Berkshire Hathaway Inc CEO Warren Buffett once explained one of the metrics he watches for a reversal in the housing market is a reduction of housing starts.
The Oracle of Omaha said in 2010 that sometimes a “bad number” for housing starts is a good thing for the market — in this case, he was referencing a cool housing market in which supply outstripped demand. The only way to solve that was to create more demand than supply by reducing the number of newly built homes.
While the macro situation affecting the housing market today is almost the opposite, the main idea from the Oracle of Omaha still stands, and that key metric ticked down again this month.
What Happened: As a result of consumers being turned off by high mortgage rates and builders being compelled to cut back, construction on new homes decreased 0.5% from October, and this trend is expected to continue through 2023.
Read also: Is The Housing Market Crashing? What Home Depot Says Is Happening Across The US
U.S. housing starts slowed to an annual pace of 1.427 million last month from 1.43 million in October and 1.49 million in September. Single-family housing starts dropped 4.1% to a rate of 828,000, while the rate for units in buildings with five units jumped 4.8% to 584,000.
Compared to November 2021, housing starts fell 8.8%.
Additionally, the number of permits, which indicates how many homes will likely be built in the coming months, decreased drastically from a record 1.9 million last December by nearly 29%% to a rate of 1.35 million.
Why It Matters: Despite the housing shortage, which some experts estimate to be between 2 million and nearly 6 million newly built homes, fewer individuals can now afford to buy a home.
Home prices are just starting to come down from record highs, and 6.51% average 30-year fixed mortgage rates inflict a burden on buyers that directly affects new construction.
What’s Next? According to Moody's Analytics Chief Economist Mark Zandi, prices will decline nationwide by around 10% from peak to trough, bottoming out in the summer of 2023.
Read also: Is There Going To Be A Housing Market Crash In 2023?
Pandemic-era hotspots like Phoenix and Boise, which saw the highest price spikes, should see additional price declines.
Prices in those areas could decrease by as much as 20%, according to Zandi.
Instead of trying to time the market, many investors are using this strategy to buy shares of individual rental properties with as little as $100 and earn passive income through all market cycles.
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