What Is Happening in the Housing Market?

Gianni Martinez, 31, thought buying an apartment was fairly easy.

Mortgage rates are now hovering around 7%, their highest since 2007, thanks to the Federal Reserve’s efforts to curb inflation. Central bankers have raised the official policy rate to about 5% over the past 15 months, which has led to higher borrowing costs across the economy.

Martinez, who works for a tech company, expected this would cool down Miami real estate. But instead, they find themselves in fierce competition for one- and two-bedroom apartments near the ocean. He has seven or eight offers and is willing to pay a 25% down payment, but he continues to lose out to those who don’t take out big mortgages and pay cash.

“I didn’t think it would be this competitive because the interest rate is 7%, but for cash buyers it doesn’t matter,” Martinez said, noting that they are competing with foreign bidders and other young people participating. pointed out. Opening the house with his parents in tow suggests that his mother or father may be helping with the expenses.

“If it’s priced right, it’s insane,” he said.

The Fed’s interest rate hikes are aimed at slowing the US economy and controlling inflation, including by curbing the housing market. Initially, these moves worked quickly to weaken the interest-rate-sensitive part of the economy, with a notable retreat in the national housing market last year. However, there seems to be a crack in the cooldown as well.

Home prices fell nationwide in the second half of 2022, but have begun to rebound in recent months and are rebounding as the market recovers. proved to be particularly strong in southern cities such as Miami, Tampa, and Charlotte. New data released on Tuesday will show whether that trend continues. Data released last week showed an unexpected surge in national housing starts in May, the biggest increase since 2016, as housing applications also rose.

The housing industry appears to be gaining new momentum. Rising house prices do not support official inflation numbers. Inflation figures are based on rent, not housing costs purchased. But the recovery is a testament to how difficult it will be for the Fed to contain economic momentum at a time when the labor market remains strong and consumer balance sheets are generally healthier than they were before the pandemic.

“That’s another data point, that things aren’t as cold as they thought,” said Kathy Vosjancic, chief economist at Nationwide Mutual. In fact, the construction of new homes “tells us where the economy is headed, suggesting that things are potentially on the upside.”

It can be important for policy. Fed officials believe the economy will need to spend some time growing below its potential for inflation to cool completely. When the economy slows down, businesses struggle to charge the same amount because consumers don’t want to buy as much.

The question is whether the economy can slow down enough when real estate is stabilizing or heating up. Homebuilders became optimistic,construction company hire workers And homeowners are feeling the emotional boost that comes with rising home equity values.

So far, Fed leaders don’t seem worried in the least.

Fed Chairman Jerome H. Powell told lawmakers last week that “the housing sector is flat across the country and may be up a bit, but it’s a lot lower than it used to be.” The next day he added: In fact, I feel like I’ve hit rock bottom now. “

Rising interest rates have significantly dampened sales existing houseHowever, demand for new homes is being strengthened by two overarching long-term trends.

Millennials, America’s largest generation, are in their late 20s and early 30s and are at their peak to buy a home independently.

And the shift to remote work during the pandemic seems to have forced people who may have been with roommates or parents to live alone. Recent co-authored research According to Adam Ozimek, chief economist at the Economic Innovation Group.

“Remote work means working from home for a lot of people,” Ozimek said. “It really adds value to the space.”

Meanwhile, the supply of available housing is tight. It’s also the Fed’s fault. Many refinanced their mortgages when interest rates were at their lowest point in 2020 and 2021, but are now reluctant to sell and lose their cheap mortgages.

“The most surprising thing about this housing market is that rising interest rates are impacting demand and supply almost evenly,” said Darryl Fairweather, chief economist at Redfin. The backlash in demand has probably been a little more intense, but builders are benefiting from a “severe supply shortage,” he said.

Prices and construction prices have made an unexpected comeback as young people continue to bid for homes and inventory is running low.

“For first-time buyers, demand has been more sustained than expected,” said Michael Fratantoni, chief economist at the Home Loan Bankers Association.

Bojancic said recent housing data would likely steer the Fed toward higher rates. Officials paused rate hikes in June after 10 straight rate hikes, but have suggested two more rate hikes are possible in 2023, including at next month’s meeting.

If there’s any silver lining for the Fed, it’s that house prices won’t directly affect inflation. The US price index tries to capture the cost of consumption, so it uses rent to calculate housing costs. Buying a home is, in a sense, an economic investment.

Rent growth has stagnated in recent months, and this is slowly being reflected in official inflation statistics as people renew their leases.

“Rent increases are taking a nice deep breath,” said Igor Popov, chief economist at Apartment List. “Right now, it doesn’t feel like a new fever is building.”

Still, at least one Fed official worries that the housing recovery could limit the scope of the economic slowdown. As home prices rise, some investors and landlords may decide to either raise rates or shift from renting to buying and selling homes to curb rental supply.

Fed Governor Christopher Waller said the recovery in the housing market has raised questions about how long rent cuts will be sustained. in speech last month.

He said the upturn “despite significant increases in mortgage rates” raised questions about “whether the benefits of slowing rent growth will last as long as we expected.”

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