Interest Rates to Remain Higher for Longer
Eye On HousingNational Association Of Home Builders Discusses Economics And Housing Policy Interest rates moved higher in recent weeks because of disappointing progress for inflation data and solid labor market reports. In fact, Fed Chairman Powell noted this week that there has been a “lack of further progress so far this year on returning to our 2% inflation goal.” These offsetting factors — higher interest rates on the negative side but supportive macro conditions — left builder sentiment flat in April. The benchmark 10-year Treasury rate has increased by more than 30 basis points since the start of April, placing long-term interest rates at their highest level since early November of last year. In turn, the average 30-year fixed-rate mortgage has increased to almost 6.9%, per Freddie Mac in last week’s data. Mortgage rates have crept higher because of concerns that inflation reduction progress has stalled in recent quarters, but they are stil well below last fall's highs when they approached 8%. The year-over-year pace for inflation ticked up to 3.5% in March, still too far from the Fed’s 2% target. The shelter inflation component (i.e., housing) remains a leading source of cost pressure at a 5.7% year-over-year gain. The best way to reduce shelter inflation is with additional supply of affordable, attainable housing which is, for the most part, out of the Federal Reserve’s control. An NAHB estimated index of residential construction costs shows why housing costs continue to rise, with building material costs up 2.2% year over year in March. Gypsum prices reached a new high in March, up more than 2% in just that month alone. Wages in home building are also increasing as the labor market remains tight. Residential construction wages were more than 6% higher than a year ago as of March, with this pace of growth accelerating over the last eight months. In February, there were 441,000 unfilled construction sector positions, the rate of which has been trending higher since March of 2023 as builders increased labor demand with expectations of improving construction conditions in 2024. Over the last year, home builders and remodelers added 78,800 jobs on a net basis to the industry’s workforce, which now totals 3.3 million. Aggregate U.S. labor data remains tight as well, which represents an inflation risk to the Fed. Total nonfarm payroll employment increased by 303,000 in March, with the unemployment level at just 3.8%. Because of the offsetting factors of higher interest rates and positive labor market conditions that support demand for new housing, the NAHB/Wells Fargo Housing Market Index, a key measure of home builder sentiment, was flat at a level of 51 in April. This relatively neutral reading of sentiment suggests the industry is set to expand construction volume later in 2024 provided interest rates move lower on improved inflation data. Fundamentally, housing itself will help this process, because as more apartments are supplied to the market, rent growth will slow, which will lower the growth rate for shelter inflation and bring overall consumer inflation closer to the Fed’s 2% target. Remodeling sentiment, as measured by the NAHB Westlake Royal Remodeling Market Index, remained positive at a level of 66 in the first quarter, indicating ongoing favorable home improvement market conditions. Nonetheless, higher rates this spring had an effect on the construction data in March. Single-family starts decreased 12.4% to a 1.02 million seasonally adjusted annual rate. The multifamily sector, which includes apartment buildings and condos, decreased 21.7% to an annualized 299,000 pace. While apartment construction starts are down, the number of completed units entering the market is rising as a result of the previously elevated construction levels. The pace of completions for apartments in buildings with five or more units is up 27.4% for the first quarter of 2024 compared to the first quarter of 2023. A higher pace of completions in 2024 for multifamily construction will place some downward pressure on rent growth and help ease shelter inflation. |
| Dr. Robert Dietz NAHB Chief Economist @dietz_econ |
