Rising interest rates, weakening demand for housing, and increasing construction material and labour costs are causing an abrupt slowdown in the US construction sector. The average 30-year fixed mortgage rate reached 7.08% in October, the highest in 20 years and more than double the level at the start of 2022. Mortgage rates have been driven up by tighter monetary policy as the Fed fights stubbornly high inflation. We expect the Fed Funds Rate to peak at 5% in January 2023. If even higher rates are necessary to bring inflation under control, mortgage rates could go even higher.
Higher mortgage rates and a slowing economy will weaken housing demand. Many first-time homebuyers are being priced out of the market, and existing homeowners will choose to stay where they are rather than negotiating new mortgages at higher rates if they move. It is therefore not surprising to see existing and new home sales to decline by 23.8% and 17.6% y/y in September, respectively. This in turn has resulted in falling house prices. According to the National Association of Realtors, the median existing-home price had dropped by 7% to $384,800 in September, from a record high of $413,800 in June. The loss of value has had a knock-on effect on homebuyers’ confidence as Fannie Mae's Home Purchase Sentiment Index fell to 60.8 in September from 74.5 a year ago, further weighing on the construction growth.
Non-residential construction is also facing headwinds with the costs of construction materials jumping 12.6% y/y in August. Inflation and increasing wages raise construction and labour costs while higher energy prices also add to the building costs. New stricter Buy America requirements that went into effect on 25 October further raise construction costs for builders and undermine the impact of new federal infrastructure investments. As the construction sector expansion slows down, we will inevitably see the resulting negative impact on demand for copper, steel, aluminium, titanium, lead, tin and nickel, the metals used most intensively in construction.
Going forward we expect to see further declines in housing starts, with the weakness mainly coming from the single-family units. We forecast housing starts for 2022 to be 1.573 million units and for 2023 to 1.447 million units, which represent 2.0% and 8.0% annual declines, respectively (Figure 1). We expect to see 4.1% y/y contraction in the construction sector as a whole in 2022 followed by a small expansion of 1.2% in 2023, as infrastructure ramps up. We expect to see housing sector recovery in 2024 as the Fed begins to lower federal funds rate bringing borrowing rates down, and the wider economy moves into recovery. Hence, we forecast 5.2% y/y growth in housing starts in 2024, with solid 5.6% y/y growth in the construction sector.
If you are keen to hear more about our views on the housing market and global economy, please refer to Global Economic Outlook and/or get in touch with us.
