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What You Don’t Want to Hear About Housing Starts

Housing starts have contracted for the third month in a row. According to an article in the WSJ (link above) economists had forecast a 3.4% increase. The actual number was a -5.5% decrease. That’s a huge miss folks and the reason is the “builders can’t keep up” fallacy.

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Housing Starts Are Falling From Rate Hikes

The reason that economists keep getting surprised about weakness in the housing sector is that their reasoning is wrong about why the sector is contracting.

Think about the spin that home builders are struggling to meet buyer demand and so that’s why starts are falling. One simple chart defeats that reasoning: Interest Rates versus Housing Starts.

Housing Starts

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Clearly you can see that when interest rates rise, starts fall. When interest rates fall, starts rise. The high correlation between rates and housing looks like a mirror image.

Anyone who has recently purchased a house has likely overpaid for it and we know this because the average selling price of homes is above even the 2007, $322,100 high.

Average selling price of homes

The average selling price today is $374,500 which is insane because wages have not kept pace with the rising cost of homes.

Now we have the Fed hiking rates which pushes up the cost of financing a home and thus it pushes housing starts down. That’s what rate hikes do, they slow down the economy because they make it more expensive to finance consumption.

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Market is fairly valued.