Housing drag

Coming into 2024, the US housing market appeared to have stabilized, helping to support overall economic growth after two straight years of declines in residential investment between mid-2021 and mid-2023. With the latest monthly data on housing activity now in hand, however, it seems clear that the sector is set to become a drag again in the second quarter: Housing starts and building permits in particular both dropped in May to the lowest levels since 2020. Other data have hardly been more encouraging. Existing home sales fell, for a third straight month, while median sales prices rose to a fresh record. The renewed decline in new construction represents another headwind for the economy at a time when growth in consumer spending has also been cooling. And it raises yet more questions about the outlook for the labor market at a time when signals from the jobs data are also becoming increasingly mixed. Perhaps more striking than the drop in starts and permits in recent months has been a plunge in the total number of homes under construction. While it's still well above pre-pandemic levels, it has also come down a whopping 5.1% so far this year, marking the biggest five-month decline since 2010. Employment growth at residential building firms and specialty trade contractors, on the other hand, has shown no signs of slowing. It's continued to outpace overall job growth this year, according to monthly payroll data. Now accounting for 2.1% of total US employment, the industry hasn't been this significant for the broader labor market since the 2000s. The Federal Reserve has kept interest rates high this year for longer than was generally expected, and that's undoubtedly taking its toll on housing. So far in this tightening cycle, the US economy has largely been able to shrug off the sector's ups and downs. But with other drivers of growth looking increasingly wobbly, housing could become more important for the broader outlook in 2024.