Housing costs keep going up despite higher interest rates....or because of them

While the overall economy continues to grow, jobs continue to be added, and inflation continue to leveling off, there seems to be one sector of the economy plagued by stagflation in the first half of 2024 - the housing market.

We got more proof of that in the later part of this week.

With the Federal Reserve making no clear commitment to when an interest rate cut may come, homebuilders are scaling back.

In May, privately owned housing starts fell to a seasonally adjusted rate of 1.277 million units, down 5.5% month over month and 19.3% compared to a year ago, according to data released Thursday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD)....

“Builders are in an ‘if you build them, they won’t come,’ market, as continued high mortgage rates keep more potential buyers out of the market,” Robert Frick, a corporate economist at Navy Federal Credit Union, said in a statement.

The number of building permits issued in May also posted monthly and yearly declines, falling to a seasonally adjusted annual rate of 1.386 million units, down 3.8% month over month and 9.5% year over year.

And it's been a consistent decline for both starts and permits in 2024, with drops in activity for multi-family units being even larger than the decline in single-family homes.

But while this portends a drop in the number of homes being completed and added future inventory, current home prices and home sales keep rising, despite the higher interest rates.

The median price of a previously owned US home climbed for the eleventh consecutive month in May, up 5.8% from a year ago, to $419,300, the National Association of Realtors said Friday. That’s the highest price ever recorded by NAR.

“Home prices reaching new highs are creating a wider divide between those owning properties and those who wish to be first-time buyers,” NAR’s chief economist Lawrence Yun said in a release. “Still, first-time buyers in the market understand the long-term benefits of owning.”….

The situation could improve somewhat later this year, when the Federal Reserve is expected to begin paring back interest rates from a 23-year high, which should bring down mortgage rates. But Fed officials have penciled in just one rate cut for this year, and the days of ultra-low interest rates are long gone. Economists don’t expect the average mortgage rate to fall below 6% in 2024.

Recent research from Zillow shows that in order for a median-income household to afford a monthly mortgage payment on the typical US home, it would need to save up more than $127,000 for a down payment. That’s roughly double the median salary of a US worker.

Potential homebuyers are indeed facing a tough market, but that doesn’t seem to be deterring some: Sales of previously owned homes in the US are up from the decades lows in the fall and only edged lower by 0.7% in May to a seasonally adjusted annual rate of 4.11 million.

And the Wisconsin Realtors Association says our state is seeing the same trends – higher prices, more sales, and homes becoming even less affordable.

May 2024 home sales rose 11% compared to May 2023, and the median price rose to $315,500, which is a 6.9% increase over the past 12 months.

On a year-to-date basis, home sales were 12.1% higher than the first five months of 2023, and the median price rose 7.3% to $295,000 over that same period.

Improving inventories helped boost sales statewide, with new listings up 4.7% compared to May 2023, and total listings up 5.4% over that same period….

The average 30-year fixed-rate mortgage rose 63 basis points over the past 12 months, hitting 7.06% in May, causing affordability to drop to an all-time low. The Wisconsin Housing Affordability Index measures the share of the median-priced home that a buyer with median family income qualifies to buy, assuming 20% down and the remaining balanced financed with a 30-year fixed mortgage at current rates. The index fell 11.3% from 133 in May 2023 to just 118 in May 2024.

And this is more proof to me that the Federal Reserve is getting it backwards when it comes to the cause-effect situation of higher, less affordable housing prices. What we need to get things more in balance is a higher amount of single-family homes onto the market, but where’s the incentive for people to sell their houses (or buy land and build new ones) when they have to take on much higher interest rates?

I’ll use our situation in Madison as an example. We bought our home in 2013, and the value has nearly doubled in that time period. We also locked into a 3% mortgage through a refinancing 4 years ago. So what incentive do we have to move from our current home to pay more for another home, and at an interest rate more than double what we’re paying now?

But the Fed is more concerned with trying to crush demand for buying homes, and are imposing economic pain and frustration on people who are already getting hurt by high rent prices and a lack of homes on the market. It’s not massive demand that is behind the absurd jump in home prices, and consumers borrowing money certainly wasn’t the reason behind the greedflation that hit the most in 2022 and whose remnants continue to this day.

It really feels like the Fed has used a 1970s playbook for a unique post-pandemic situation in the 2020s. They were slow to start to raise rates when inflation was clearly hitting in 2021, and then had to drastically raise them in order to catch up. Now they’re being caught short in the other way, and aren’t understanding that the effects on consumers and businesses for higher rates is different now (coming off of a time of historically low rates) than if we started from a higher point (like we would have in the 1980s or 1990s).

I also can’t help but notice how Donald Trump was whining about Fed Funds rates in the later half of 2019 that were 3% lower than what we have today, and got them to start cutting even before we knew COVID was a thing.

Trump demanded negative interest rates and then unironically called the Fed Chair he nominated a bonehead.

That’s an impressive lack of self awareness even from him. pic.twitter.com/cIH8z4diCK

— Angry Staffer 🌻 (@Angry_Staffer) September 11, 2019

That was a time period when unemployment was lower than it was today (3.6% then vs 4.0% now) and CPI inflation over the previous six months was only 0.1% a month lower than we have today (1.7% increase today, 1.1% in Aug 2019).

So explain to me why interest rates today are more than twice what we had before the Fed started cutting in Summer 2019? There is zero reason for this beyond an arbitrary desire for the Fed to have inflation be 2% instead of 3% (neither figure would change outcomes much), and the high cost of housing is basically the only negative part of what is still a good economic situation. I know it’s not considered proper for President Biden and Dems to complain about the decisions of the Federal Reserve, but if the Fed’s policies are something that might hurt the Dems’ chances of victory in November, why shouldn’t they be talking about the Fed’s choices? AND DO IT NOW, ahead of the Fed’s next meeting at the end of July.

After all, if Donald Trump can bully the Fed into a wrong policy in 2019, why can't Dems push the Fed to do the right thing, and cut rates in Summer 2024?