New residential construction in the US increased last month to a seasonally adjusted annual rate of 914,000, which is nearly 7% higher than April’s count. Meanwhile, newly issued building permits declined 3.1% in May to a seasonally adjusted 974,000 annual pace vs. the previous month. Nonetheless, the housing recovery is still very much alive and kicking. But today’s numbers are a reminder that growth is probably slowing, which is only natural as new supply moves in line with demand. The last year or so has been about playing catch-up with demographics, but the big adjustments are probably behind us. The cycle for housing construction, in other words, is maturing.

Meantime, the key risk in the months ahead can be summed up in one question: How will the end of the Federal Reserve’s quantitative easing monetary policy strategy impact housing? Interest rates aren’t likely to rise any time soon, certainly not in tomorrow’s FOMC announcement. But with growing confidence that modest growth for the economy is the likely path ahead, the crowd’s increasingly focused on the recent rise in mortgage rates and what it means for housing recovery going forward.

The average 30-year fixed mortgage in the US has jumped to nearly 4% through last week vs. 3.3% at the end of 2012. So far, the higher costs of financing home purchases hasn’t hurt the housing market per se, in part because rates remain near record lows, even after the recent increases. New home sales in April, for instance, remained near post-recession highs while home prices generally continue to increase.
New residential construction’s annual pace remains strong as well, with housing starts climbing 20% in May vs. the same month a year ago. That’s off the highest growth rates reached in recent months, but it’s inevitable that the pace will slow as the cycle moves into the equivalent of middle age.

That said, the outlook is still bright. Confidence in the homebuilding industry jumped to a seven-year high in yesterday’s June update, according to the National Association of Home Builders/Wells Fargo Housing Market Index. “Builders are experiencing some relief in the headwinds that are holding back a more robust recovery,” NAHB Chief Economist David Crowe said in a press release. “Today’s report is consistent with our forecast for a 29% increase in total housing starts this year, which would mark the first time since 2007 that starts have topped the 1 million mark.”
Higher rates in theory create headwinds for real estate activity, but it’s easy to overstate this risk factor while mortgages remain near historical lows. Much depends on how and when the central bank moves monetary policy to something approximating normality. That’s a big unknown at this point in terms of timing and degree. Assuming the process is handled properly (and there’s no reason to assume otherwise at this stage), it’s reasonable to expect that housing will continue to be a net plus for the economy for the foreseeable future. The mistake is assuming that housing will continue to grow at extraordinary high rates. That phase is probably behind us.