Rates and inflation
Today, the Federal Reserve announced a 0.25% increase to its federal funds rate following weeks of banking sector turmoil.
This comes amid inflation reports from last week showing that inflation, although still elevated, appears to be decelerating. According to Jeff Cox of CNBC, the consumer price index increased 0.4% in February, setting an annual inflation rate of 6%. This was the smallest yearly gain since September 2021, and the eighth straight month of deceleration.
Source: CNBC (March 2023)
Last week, Cox noted: “Heading into the release, markets had widely expected the Fed to approve another 0.25 percentage point increase to its benchmark federal funds rate. That probability rose following the CPI report, with traders now pricing in about an 85% chance that the Fed will hike the rate by a quarter point.”
Fannie Mae commented on the inflation data, highlighting that the inflationary data points to continued upward pressure by the Fed on interest rates. This doesn’t factor in the recent banking collapse of Signature Bank and Silicon Valley Bank, Fannie Mae notes, which may cause more caution from the Fed moving forward on rate hikes. For housing, Fannie Mae summarizes:
“On balance, we continue to believe [housing] starts will trend down this year but acknowledge additional uncertainty regarding how developments in the banking system could affect construction activity. While the immediate pullback in interest rates is supportive of housing, potential tighter lending standards and worries about a broader economic downturn may have the opposite directional effect.”
Fan-Yu Kuo of the National Association of Home Builders (NAHB) reports on the inflation data specific to housing, noting that despite slowing inflation, “the shelter index (housing inflation) continued to rise at an accelerated pace and was the largest contributor to the total increase, accounting for over 70% of the increase. Shelter inflation is a lagging indicator and will primarily be cooled in the future via additional housing supply.”
As noted above, signs point to a slowdown in construction over the coming years despite the need across the board for more housing supply. Robert Dietz of NAHB reports that costs and availability of housing inventory will remain a “critical constraint for prospective home buyers.” Reportedly, 40% of builders surveyed currently cite lot availability as poor. Further, banking pressure, particularly from regional financial institutions, will make lending conditions even tighter than they currently are.
Orphe Divounguy of Zillow reports that 1.56 million homes were completed in February, an increase of 12.2% month over month and 12.8% year over year. This increase in supply bodes well for the typically busy spring purchasing season.
George Ratiu of Realtor.com reports on builder confidence, which is increasing due to a moderation of building material pricing, such as lumber. Both permits and housing starts are increasing month over month, likely as a reflection of builders wanting to get to completion to offset growing debt costs.
Indeed, builders are also facing headwinds on their debts, according to Robert Dietz of NAHB, pointing to a future slowdown of housing starts. With interest rates rising, the construction and bridge debt associated with single-family homes and multifamily construction is getting more expensive. This is occurring as we see a general flattening of housing prices nationwide.
Source: NAHB (March 2023)
“Residential construction loan volume reached a post-Great Recession high during the fourth quarter of 2022, as home building activity and new home sales remained below trend. Outstanding builder loan balances are rising as development debt is being held longer as new homes remain in inventory longer. Loan balances will decline in coming quarters as the development loan market becomes more costly and tighter given higher interest rates. This is a reminder that tighter monetary policy affects not only housing demand but housing supply as well.”
According to Lily Katz of Redfin, although rent growth across the nation is decelerating, some markets are bucking the trend of slow growth:
- Charlotte, NC (+14.3% YoY)
- Columbus, OH (+12.6%)
- Milwaukee (+9.5%)
- Nashville, TN (+9.0%)
- Indianapolis (+8.5%)
- Kansas City, MO (+8.3%)
- Hartford, CT (+6%)
- Buffalo, NY; Providence, RI (+5.9%)
- Cincinnati; Louisville, KY; Memphis, TN (+5.5%)
- Riverside, CA; San Diego (+5.3%)
Similarly, Christine Stricker of ATTOM Data Solutions reports on the top 10 single-family rental growth markets so far in 2023. Of note, nationwide, ATTOM expects that the average annual gross rental yield on 3-bedroom properties will be 7.5% in 2023.
Source: ATTOM Data Solutions (March 2023)
RentCafe builds out its own top 10 rental markets throughout the first quarter of 2023, highlighting that North Jersey is the most competitive rental market, and that 8 of the 20 most competitive markets for rentals are in the Northeast.
Also of note, RentCafe finds that apartments are much more difficult to source in small, low-profile markets, highlighting a supply gap in secondary and tertiary markets.
Source: RentCafe (March 2023)
“A combination of factors including rapid inflation, interest rate hikes, high home prices, and increased costs of living are pushing many renters to reconsider their housing options. So, as the new year unfolded, many were seeking better living situations within their budgets.”
Finally, Evan Wyloge of Realtor.com outlines this year’s best U.S. cities for home sellers. That is, where homes are selling faster than in the rest of the country and where the price per square foot has increased the most annually.
Source: Realtor.com (March 2023)