Housing Market Reset Continues

• Total housing starts fell by 9.6% in July 2022, 1.45 million annualized pace the slowest since February 2021
• Total building permits slowed by 1.3% in July 2022 versus June, down in weakening out of the past four months
• Total residential completions increased slightly in July 2022, up 1.1% versus June

The U.S. housing market continued to weaken in July 2022 with housing starts numbers sliding 9.6% versus the month prior. At an annualized pace of 1.45 million, total housing starts are now down 20% from their peak reached in April (1.81 million annualized). Single-family housing starts were down 10.1% in July to 0.92 million at an annualized pace, posting their weakest result since the early stages of the pandemic (0.90 million in June 2020; 0.69 million in April 2020).

Housing supply was a significant contributor to rising house prices even prior to the pandemic, and the trend of slowing construction activity will complicate the housing market’s slowing demand dynamic that should be easing price pressures. Lack of supply will prolong the path to house price equilibrium.

New issuance of building permits slowed in July 2022, reinforcing the notion that builders are following current homebuying trends toward less building activity. Total building permits issued in July 2022 were down by 1.3% versus June and permits for single-family residential homebuilding fell by 4.3% for the month. Mortgage rates have risen in response to the Federal Reserve’s monetary policy tightening efforts, and the expectations of an economic slowdown anticipated for the U.S. consumer overall.

However, there remains hope that the U.S. economy can avoid a full-on recession, which would allow mortgage rates to back down in the second half of 2023, as is the case in PNC’s current interest rate forecasts. This potential outcome for homebuyers offers some validation to building permit issuance not collapsing completely, as permits would translate into homes available for purchase on a delay.

Total housing construction completions increased slightly in July 2022, maintaining a level above an annualized pace of 1.4 million. As noted above, the current number of residential building completions is based upon permits issued over the past year. Indeed, the pace of total building permit issuance for residential construction saw a dramatic acceleration between the third and fourth quarters of 2021.

If existing home price growth slows to a sustainable pace – following the decline already in place in the market’s sales numbers through the first half of this year – the mix of new and existing homes on the market in the second half of 2023 may well resemble a broadly sustainable market in terms of supply/demand balance and pricing. Consumer demand may also be set to return at that point, after the Fed’s “Demand Destruction” campaign of monetary policy tightening works its way through consumption trends.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.