The housing market is unlikely to make the Fed’s job easier any time soon.
Housing costs look to remain high in battle to tame inflation.
By Christine Cooper and Chuck McShane CoStar Analytics | October 23, 2024 | 10:34 A.M.
The Feds are in a “catch 22”:
Lower interest rates drastically to help increase the supply of housing by making it less expensive for builders to borrow AND making it more palatable for would-be sellers to list their homes thereby increasing supply, but also increasing demand causing prices to continue to increase in the short to mid-term, which could also increase inflation
Keep interest rates where they are and continue to depress the supply pipeline of housing which is still at deficit levels due to the 2010-2019 decade low levels of construction, and depress the demand pipeline due to the lowered affordability levels due to high prices and high interest rates, further causing prices to increase in the short to long-term, which will continue to keep inflation above 2% target levels
With only .29 Single Family Completions per 100 people as of September 2023 compared to an average of .49 Completions between 2000-2008, there is still a lot of lost ground that needs to be made up before we are at balance with supply/demand needs
With positive data on the health of the job market recently raising hopes for a soft landing, the Federal Reserve’s fight to tamp down on the last leg of inflation has come into focus. Yet one persistent challenge has been housing costs, with year-over-year increases in the shelter component of the Consumer Price Index rising at 4.9%, essentially double the pace of headline inflation, as of the most recent September reading.
While a surge of apartment construction has led to some relief for renters, especially in the Sun Belt region, a decades-long shortfall in for-sale housing construction has done little to rein in single-family home prices. Prices continue to climb despite a doubling in the average 30-year fixed mortgage rate over the past three years.
The latest housing starts data from the U.S. Census Bureau, released last week, presents positive news for prospective homebuyers in some regions and a warning sign for renters. While overall new housing starts fell 0.5% in September compared to August and 0.7% compared to last September, the decline was largely confined to multifamily units. Single-family starts ticked up by 2.7% month-over-month and 5.5% year-over-year. At the same time, starts of buildings with five or more units were down 4.5% since August and 15.7% since September 2023, which likely understates the decline in new starts. CoStar data shows a year-over-year decline in multifamily starts of 47%.
About 1.35 million total units started in September, with 1.03 million coming from single-family homes. It was the strongest month for single-family home starts since April and up from pre-pandemic trends. However, that total remains lower than the 1.12 million average in the low-interest rate period from late 2020 to late 2022 and well below the 1.45 million annual starts seen in the pre-Global Financial Crisis era from 2000 through 2006, when the U.S. population was smaller.
The uptick in single-family starts indicates higher future completions in the coming eight to 12 months. While September single-family completions were down slightly, month-over-month, longer-term trends have increased over the past year. When adjusted for population, single-family completions jumped to 0.32 per 100 population from 0.29 per 100 in September 2023. That was the highest population-adjusted rate of completions since April 2008 but still significantly below the average of 0.49 per 100 from 2000 to 2008.
New single-family housing construction could help slow the pace of home price increases by adding more inventory to the market — however, new construction accounts for only about 15% of total home sales. Existing home sales have been suppressed due to the “lock-in” of homeowners with sub-4% interest rates secured before 2022, who are reluctant to re-enter a higher interest rate market.
While the Federal Reserve’s cut of 50 basis points in mid-September raised hopes for lower consumer interest rates, mortgage rates have not followed suit. According to the Mortgage Bankers Association, the 30-year fixed mortgage rate ticked up to 6.5% the week ending Oct. 11 from a trough of 6.1% the week ending Sept. 22. Mortgage rates tend to track longer-term interest expectations, most notably the 10-year Treasury yield, which rose recently as market sentiment shifted toward expectations of slower future rate cuts. That led to a decline in new mortgage applications as persistently higher rates limit the pool of buyers who can afford a mortgage.
New single-family housing permits, which measure approvals for future starts, were up about 0.3% monthly in September but were about 1.2% down year-over-year. Homebuilder sentiment also ticked higher in September, according to the National Association of Home Builders. Improvement was notable across most regions, though the long-sluggish Northeast region saw the most significant breakout. Though the region accounts for the smallest share of permits, starts and completions, all three categories outpaced other regions, with permitting up 13%, starts up 77%, and completions up about 53%.
The South, which accounts for nearly 60% of all permits, starts and completions, was the sole contributor to the decline in permits. While starts were up 1.9% in the region, year-over-year, new permits fell 8.5% and completions dropped 7.4% in the same period. The impacts of Hurricane Helene late in the month may have weighed that total, and Hurricane Milton’s arrival after that could also tamp down on October’s count in the South region.
With colder months ahead, single-family housing starts are unlikely to break out in the next few months, especially in the Northeast and Midwest. As long as interest rates remain elevated, for-sale inventory will likely stay low, limiting downward pressure on housing prices, even if growth in materials and labor costs eases.
At the same time, the plunge in multifamily permits and starts will soon translate into fewer multifamily completions. And while rent growth has been largely flat-to-negative in some regions over the past year, the lack of new multifamily supply could lead to re-accelerating rent costs by late 2025.
Among inflation contributors, housing costs could be the toughest for the Fed to tame.
What We’re Watching …
While rising housing costs are still a challenge, there are plenty of other reasons to worry about the potential for inflation re-accelerating. A still resilient labor market saw wage inflation pick up in September and surging retail sales in the month suggest consumer demand remains strong — and could be boosted further by additional rate cuts later in the year. All of that, plus the prospect of rebuilding in hurricane-hit regions could push the cost of supplies and materials higher. This list is not exhaustive, so we might expect the Federal Reserve to be cautious as it considers its policy moves going forward.
Link to article: https://product.costar.com/home/news/shared/806922005/the-housing-market-is-unlikely-to-make-the-feds-job-easier-any-time-soon
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