Home construction surged in May and prices have ticked up, even with interest rates at a 15-year high. The resilience has surprised some economists.
Gianni Martinez, 31, thought that it would be fairly easy to buy an apartment.
Mortgage rates are now hovering around 7 percent — the highest they’ve been since 2007 — thanks to the Federal Reserve’s efforts to tame inflation. Central bankers have lifted their official policy rate to about 5 percent over the past 15 months, which has translated into higher borrowing costs across the economy.
Mr. Martinez, a tech worker, expected that to cool down Miami real estate. But instead, he is finding himself in stiff competition for one- to two-bedroom apartments near the ocean. He has made seven or eight offers and is willing to put 25 percent down, but he keeps losing, often to people paying cash instead of taking out a pricey mortgage.
“Because of interest rates at 7 percent, I didn’t think it would be this competitive — but that doesn’t matter to cash buyers,” Mr. Martinez said, noting that he’s competing with foreign bidders and other young people who show up to open houses with their parents in tow, suggesting Mom or Dad may be helping to foot the bill.
“When there is a correctly priced listing, it’s a madhouse,” he said.
The Fed’s rate increases are aimed at slowing America’s economy — in part by restraining the housing market — to try to bring inflation under control. Those moves worked quickly at first to weaken interest-sensitive parts of the economy: Housing markets across the United States pulled back notably last year. But that cool-down seems to be cracking.
Home prices fell nationally in late 2022, but they have begun to rebound in recent months, a resurgence that has come as the market has proved especially strong in Southern cities including Miami, Tampa and Charlotte. Fresh data set for release on Tuesday will show whether that trend has continued. Figures out last week showed that national housing starts unexpectedly surged in May, jumping by the most since 2016, as applications to build homes also increased.
Housing seems to be finding a burst of renewed momentum. Climbing home prices will not prop up official inflation figures — those are based on rental rather than purchased housing costs. But the revival is a sign of how difficult it is proving for the Fed to curb momentum in the economy at a time when the labor market remains strong and consumer balance sheets are generally healthier than before the pandemic.
“It’s another data point: Things are not cooling off as much as they thought,” said Kathy Bostjancic, chief economist for Nationwide Mutual. In fact, new housing construction “tells us something about where the economy is headed, so this suggests that things are potentially picking up.”
That could matter for policy: Fed officials think that the economy needs to spend some time growing at a speed that is below its full potential for inflation to fully cool off. In a weak economy, consumers don’t want to buy as much, so companies struggle to charge as much.
The question is whether the economy can slow sufficiently when real estate is stabilizing or even heating back up, leaving homebuilders feeling more optimistic, construction companies hiring workers and homeowners feeling the mental boost that comes with climbing home equity.
So far, the Fed’s leader, at least, has sounded unworried.
“The housing sector nationally has flattened out, and maybe ticked up a little bit, but at a much lower level from where it was,” Jerome H. Powell, the Fed chair, told lawmakers last week, adding a day later that “you’ve actually kind of seen it hit a bottom now.”
Higher rates have helped to markedly cool down sales of existing homes, to his point, though demand for new houses is being bolstered by two sweeping long-run trends.
Millennials — America’s largest generation — are in their late 20s and early 30s, peak years for moving out on their own and attempting to purchase a house.
And a shift to remote work during the pandemic seems to have spurred people who might otherwise have stayed with roommates or parents to live on their own, based on recent research co-written by Adam Ozimek, chief economist at the Economic Innovation Group.
“Remote work means working from home for a lot of people,” Mr. Ozimek said. “That really increases the value of space.”
Available housing supply, meantime, has been tight. That’s also partly because of the Fed. Many people refinanced their mortgages when interest rates were at rock bottom in 2020 and 2021, and they are now reluctant to sell and lose those cheap mortgages.
“The most surprising thing about this housing market is how the increase in interest rates has affected supply and demand pretty equally,” said Daryl Fairweather, chief economist at Redfin. The pullback in demand was probably a bit more intense, she said, but builders are benefiting from a “dire lack of supply.”
As young people continue to bid on houses and inventory comes up short, prices and construction are staging their surprise comeback.
“Demand has hung in there better than we would have expected for that first-time buyer,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association.
Ms. Bostjancic said that the recent housing data will probably nudge the Fed toward higher rates. Officials paused their rate moves in June after 10 straight increases, but have suggested that they could lift them twice more in 2023, including at their meeting next month.
If there’s a silver lining for the Fed, it is that home prices will not directly feed into inflation. America’s price measures use rents to calculate housing costs because they try to capture the cost of consumption. Buying a home is, in part, a financial investment.
Rent growth has been stalling for months now — which is slowly feeding into official inflation data as people renew leases.
“Rent growth is taking a nice, deep breath in,” said Igor Popov, chief economist at Apartment List. “Right now, it does not feel like there’s a lot of new heat.”
Still, at least one Fed official has fretted that the pickup in housing could limit the scope of that slowdown. As home prices rise, some investors and landlords could decide to either charge more or to shift from renting out houses and to buying and selling them — curbing rental supply.
“A rebound in the housing market is raising questions about how sustained those lower rent increases will be,” Christopher Waller, a Fed governor, said in a speech last month.
He said that the upturn “even with significantly higher mortgage rates” raised questions “about whether the benefit from the slowing in rent increases will last as long as we have been expecting.”
Source: Economy - nytimes.com
