US Housing Market Flashes Warning Signs as Price Growth Cools
Record unaffordability and high mortgage rates are sidelining buyers, yet a shortage of existing homes is providing a lifeline to new homebuilders.
The U.S. housing market is sending increasingly mixed signals as surging mortgage rates and a historic affordability crisis finally begin to cool rampant price growth, creating significant headwinds for the construction sector heading into the new year.
The S&P Case-Shiller National Home Price Index, a key barometer for the market, registered a mere 1.3% increase in the 12 months through September, marking its weakest performance since mid-2023. This slowdown reflects a market grappling with the Federal Reserve's aggressive monetary tightening, which has pushed borrowing costs to levels not seen in a generation and sidelined a large swath of potential buyers.
The core of the issue is a severe affordability crunch. In 2023, a household with a median income would have needed to spend a record 41% of their earnings on monthly housing costs, according to data from Redfin. This financial strain has created a standoff, with would-be buyers unable to qualify for loans and existing homeowners unwilling to sell and forfeit their low-rate mortgages—a phenomenon known as the "lock-in effect."
This has led to a bifurcation in the market. While sales of existing homes have stumbled, the market for new construction has shown surprising resilience. With few previously-owned homes available, buyers have increasingly turned to builders, who can offer financial incentives and, most importantly, inventory. New home sales jumped 8% in December from the prior month, contributing to a full-year 2023 total of 668,000 new homes purchased, ending a two-year decline.
This unique dynamic powered an unexpected and powerful rally in homebuilder stocks throughout 2023, even as the broader housing data appeared bleak. Investors bet that the largest builders were uniquely positioned to consolidate market share in an inventory-starved environment. The iShares U.S. Home Construction ETF (ITB) surged approximately 65.8% in 2023, while the SPDR S&P Homebuilders ETF (XHB) climbed around 56.5%, as reported by Nasdaq late in the year.
However, the outlook remains uncertain and heavily dependent on the path of interest rates. Mortgage rates, which peaked above 8% in October before retreating, remain the single most significant lever for the market's health. While hopes for Federal Reserve rate cuts in the coming year have buoyed sentiment, any deviation from that path could quickly chill the fragile recovery in demand.
Builders themselves are proceeding with caution. Privately-owned housing starts saw a monthly decrease of 4.3% in December, signaling that the industry is carefully managing its pipeline to avoid creating a glut of unsold homes in a challenging market. For now, the housing sector remains a tale of two markets: one frozen by high rates, and the other sustained by a historic lack of supply.