Housing Navigating Through High Interest Rates

The US Census Bureau reported today that March housing starts plummeted 14.7% month over month (MoM) to 1.321 million. This reverses February MoM gain with March’s new starts the lowest since August 2023 and biggest decline since April 2020. 

Looking closer at the report, single-family residential (SFR) housing starts dropped 12.4%, while multi-family of 5 units or more dropped 20.8%. Geographic MoM changes experienced wide differences, with housing starts dropping 36% in the Northeast, 23% in the Midwest, 17.8% in the South, and 7.1% in the West. It remains mind-boggling how the West, specifically California, continues to buck the trends despite regular reports of the massive exodus of people leaving California. So many people have left California, and in 2021, the state lost for the first time in history a Congressional seat.

Builders have been reluctant to aggressively invest in new construction as potential buyers are facing multi-decade high mortgage rates. Bankrate reported today that 30-year fixed mortgage rates for purchase have increased this week by 0.17% to 7.3% and for refinance increased 0.20% to 7.31%. 

National mortgage rates have been declining since 1990 to bottom out on December 11, 2020 at 2.85%.Since then, rates have nearly tripled as the Federal Reserve began their aggressive rate hike campaign to slow inflation that was quickly accelerating to 10% annualized rate by end of 2021. 

So, you may be wondering why housing prices are holding or even increasing in many regions. One explanation may be the lack of inventory. New construction for housing has fluctuated dramatically over the past 65 years as developers are quick to stop production if they perceive risks with future unfavorable buying environments. Looking at new housing starts back to 1959; you can see how quickly housing starts can increase or decline in very short periods. 

The biggest decline in new housing starts occurred following the 2008 Housing Crisis, in which new starts plummeted to 473,000 in April 2009 and didn’t get back above 1 million new starts until December 2014. The Real Economy Blog projects that about 1.7 million new residential units are needed to meet new buyer demands by 2030 and replace dwellings being demolished. When new construction drops below this level for extended periods, the imbalance of demand over supply increases. According to Real Economy Blog, US developers have not been building enough new residential units for the past 15 years, and currently, they project that there are about 3.5 million homes short of meeting demands for a stable market. In their January 22, 2022 report, they provided the chart below that illustrates the shortages of new housing starts for the past 25 years.

Housing inventory peaked in 2007 at 4.040 million houses, and since then, the inventory of available homes has been declining. The average inventory of available homes since 1982 has been around 2.263 million. The inventory was wiped out during the pandemic due to the combination of ultra-low mortgage rates and the ability for people to relocate as businesses embraced remote working arrangements. Inventory plummeted to 860 thousand in January 2022 and has since been slowly recovering supply.

Even with high interest rates, demand remains greater than supply and allows sellers to sell with little price concessions. If builders continue to undersupply with new construction, then housing prices may continue to hold or even rise. Should mortgage interest rates drop below 6%, buyers and, especially first-time homeowners, may return to the market in greater force, which may result in a boost in prices. For now, both buyers and sellers seem to be cautious about making any moves unless their situation with employment or other reasons requires a housing change.

What Does This Mean to Me?

The US economy benefits from a stable housing market. The single largest transaction most consumers will make will be the purchase of their home. In addition to the cost of buying a home, new homeowners typically incur other costs to upgrade their homes, from small fix-up projects to extensive house remodeling. Sellers also incur pre-sale costs to prepare the home for maximum valuation and appeal. Helping both buyers and sellers has been one of the challenges of the past three years, with supply chain issues, even though many material prices are still above pre-pandemic levels. 

We maintain our favorable view on the US economy and stock market. It is easier for investors to remain bullish on the stock market when their home values are stable. Even though one is not selling their home, when home prices are fluctuating widely it can prompt investors to become conservative with their other investments.

Let us know your thoughts on this issue. More importantly, give us a call or send an email to schedule a time to discuss your financial situation and how we can help.