Some "Good News" for Homebuilders

Yesterday, in Monthly Mortgage Payments Up Record Year-over-year, I mentioned some “good news” for homebuilders:

Even though we can expect significant further declines in new home sales and single-family housing starts, the good news for the homebuilders is activity usually picks up quickly following an interest rate induced slowdown (as opposed to following the housing bust when the recovery took many years).

Here is a graph to illustrate this point. The following graph shows new home sales for three periods: 1978-1982, 2005-2020, and current (red). The prior peak in sales is set to 100.

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. Here is the graph of new home sales since 1963 and you can see the rapid recoveries following the ‘73-74’ bust, ‘78-’82 bust, and ‘89-’91 bust.

And here is a graph from FRED of the effective Fed Funds Rate during the same period.

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. And that was my point in the previous article.