Good News for Home Builders: Market Activity Expected to Pick Back Up After Slowdown

Though new-home sales and single-family housing starts are expected to slow amid rising interest rates, Bill McBride predicts that market activity could soon pick back up following an interest rate-induced slowdown. While home sales recovered quickly following a similar market slowdown in 1992, a rising number of distressed sales during the mid-2000s housing bubble led to fewer new-home sales for years. This time around, McBride predicts few distressed sales and an uptick in activity once the Fed starts its next easing cycle, a silver lining for home builders adding supply to a market characterized by waning demand.

When the Fed took their foot off the brake in 1982, new home sales recovered fairly quickly (blue). The same is true for the 1989 -1991 bust (not shown).

However, following the housing bubble, new home sales languished for several years – well after the Fed reduced the Fed Funds rate to zero – due to all the distressed sales on the housing market. 

My expectation is new home sales will bounce back fairly quickly once the Fed starts the next easing cycle since there will be few distressed sales.