Two Bright Spots in a Cooling Housing Market

Surging mortgage rates and uncertainty about the economy have put the housing market on ice. Mortgage purchase applications dropped Wednesday morning to their lowest level in 25 years and single-family housing starts will soon be down 20% on a year-over-year basis. Historically, a drop of more than 20% in single-family housing starts has meant pretty good odds for an overall recession.

Yet the US economy added 263,000 jobs in September. And while the labor market is somewhat cooler from earlier in the year, it's a long way from anything that could be characterized as weak.

What could change this? One possibility is that it's just too early to see the impact, and the weakness in the housing market will pack more of a punch sometime next year. But I see two reasons for optimism that something structural has changed compared with prior housing cycles, making the US economy better able to weather a downturn in single-family housing activity.

The first reason for optimism is that demand for multifamily housing has remained strong, as has apartment construction. High mortgage rates don’t make the need for shelter go away, and if buying becomes too difficult, people are pushed into the rental market. Multifamily housing starts remain close to the highs of the cycle, and at a level 50% higher than we saw at the peak of the mid-2000s housing bubble. As long as housing units are still being built there will be jobs for construction workers and demand for related products and services. That’s helping offset the downturn in single-family activity.

The second point is that the level of overall job openings, even though it has declined somewhat from the spring, remains very high historically. In August there were 10 million nonfarm job openings in the US. That compares with 7 million at the onset of the pandemic and 5 million in early 2007 as the housing bubble was deflating. Even in the construction industry, there are twice as many job openings as there were in the mid-2000s. That leaves a lot of room for the labor market to weaken before it leads to a significant rise in joblessness. Even within construction, if there are layoffs in the single-family housing industry, workers can shift to building apartment buildings, warehouses for e-commerce, and projects funded by all the infrastructure spending approved by Congress.