Despite the Fed’s rate pause last week, Howard Schneider and Michael S. Derby of Reuters report that Fed Chair Jerome Powell left it open for two more rate hikes before the end of 2023. Although the central bank is optimistic about slowing inflation, a strong economy and job growth may put pressure to increase rates before the end of the year.

Christopher Rugaber of Fortune reports on this topic, noting that the pause in rate rises will allow the Fed more time to assess the impact of rate increases on inflation and the economy. “In a surprisingly hawkish signal, the Fed officials issued projections Wednesday showing they envision as many as two additional quarter-point rate hikes before the year ends…Before this week’s policy meeting, Fed watchers had expected the officials to signal just one more rate increase this year.”

Flávia Furlan Nunes of HousingWire reports a similar analysis, commenting that mortgage rates will remain elevated for the remainder of the year and that mortgage originations will also see ongoing downward pressure as a result.

Dana Anderson of Redfin reports on mortgage rates, noting that 4 in 5 homeowners with mortgages have a rate below 5%, and nearly one-quarter have one below 3%. As rates remain elevated due to central bank policies, this will mean fewer and fewer resale homes will come on the market as homeowners choose to stay put and keep their below-market rate.

Source: Redfin (June 2023)

Construction slowdown

In addition to the slumping housing supply, construction is also taking a break, according to Danushka Nanayakkara-Skillington of the National Association of Home Builders (NAHB). By April 2023, the total number of single-family permits issued for the year nationwide hit 268,205, a 29% decline from the April 2022 levels.

Source: NAHB (June 2023)

“Between April 2022 YTD and April 2023 YTD, except for New Jersey, all the other states and the District of Columbia reported declines in single-family permits. New Jersey posted a modest 1.1% increase while the other states posted declines ranging from 4.5% in Hawaii to 59.7% in Montana. The ten states issuing the highest number of single-family permits combined accounted for 65.0% of the total single-family permits issued.”

Jesse Wade, also of NAHB, comments on the slowdown, noting that it is less pronounced in lower-density markets that are more affordable. In larger metros, single-family permits fell 22.3% in Q1 2023, with the micro county segment only falling 2.9%. “Over the past four years rural markets have exhibited particular strength. The rural (Micro Counties and Non Metro/Micro Counties) single-family home building market share has increased from 9.4% at the end of 2019 to 12.0% by the first quarter of 2023.”

According to Patrick Sisson of the New York Times, this comes amidst an increasing need for more affordable builds. In 2021, 160,000 affordable homes and apartments were built, but the need for this market segment increased by over 500,000, with the national supply shortage now sitting at 7.3 million homes.

Vincent Salandro of Builder reports on how construction labor affects the slowdown in new builds. Currently, the estimates are that the construction industry needs to add some 723,000 workers every year to meet the current demand.

Crash proof?

Given our shortage of housing supply due to slowing construction and fewer resale homes, many believe this will keep prices elevated for the foreseeable future and help avert any potential housing crash. According to Christy Murdock of Inman, historically low housing inventory, pent-up demand, and high homeowner equity suggest that housing prices won’t be crashing anytime soon despite high debt costs. 

Indeed, homebuying competition is on the rise again, according to Jeff Tucker of Zillow. Month-over-month home prices climbed 1.4% between April and May 2023, and total active inventory in May fell 3.1% and is 45.7% below May 2019 levels. 

Dana Anderson of Redfin reports that there are 40% fewer resale home listings than there were pre-pandemic, highlighting the ongoing supply shortage of homes for sale. This trend will likely persist due to the above-noted upward pressure on interest rates for at least the remainder of the year.

Source: Redfin (June 2023)

Redfin Economics Research Lead Chen Zhao notes: 

“The Fed’s indication that there are more rate hikes to come is not what homebuyers want to hear. It’s likely to keep mortgage rates elevated and may even push them up a bit…People who are sitting on the sidelines, waiting for mortgage rates to decline, should know that’s unlikely to happen in the foreseeable future. If a home that’s in your price range and has everything on your wishlist hits the market, there’s no good reason to wait.”