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Thoughts From Last Week
While a recession could lead to further declines in demand, the acute drag from housing activity on the economy seems to be behind us.
Last month’s CPI report showed shelter prices growing at the slowest rate since November 2022 at 0.6% m/m. Despite still-elevated y/y growth of 8.2%, this reading was an encouraging sign the CPI measure is finally beginning to factor in the housing market slowdown that started last year. On the back of rising mortgage rates, construction activity cratered in 2H 2022, with housing starts falling by 40% and 14% annualized in 3Q22 and 4Q22, respectively. Most recently, March housing data have come in mixed, pointing toward a stabilizing housing market as opposed to an improving one after very positive February data. Housing starts dropped 0.8% m/m to 1.42M, slightly above forecasts, while building permits were down 8.8% m/m with both figures having risen more than 5% year-to-date.
At the same time, mortgage applications continue to be weak as 30yr fixed mortgage rates remain elevated at 6.4% as of last Friday (but below last fall’s peak of 7.1%). However, mortgage rates may not need to decline significantly for housing demand to stabilize, as higher-for-longer rate expectations may be enough to convince potential buyers to enter the market. Looking ahead, the April NAHB survey increased to its highest level since September, signaling that builders are becoming more optimistic about home buyer activity. While a recession could lead to further declines in demand, the acute drag from housing activity on the economy seems to be behind us. For inflation, the lagged impact of last year’s housing contraction should continue to show up in softer shelter prices as the year goes on.
Source: FactSet, J.P. Morgan Asset Management.