Fundamentals continue to support housing growth as there continue to be too few houses and too many buyers. The shortage of new home construction which came out of the 2008 financial crisis has not abated. To be clear, the early 2000s boom relied on high levels of mortgage debt to feed an unsustainable demand for housing, which is quite different from today’s environment.
The Fed is juggling several balls with few tools. To help cool overall economic demand we imagine they will use higher mortgage rates to drive a pull-back in residential price appreciation.The obvious concern is the fine tuning required to make these adjustments without driving the economy into recession.
The effect of rate changes on housing is on a tail end of the overall demand: consumers whose sensitivity to mortgage rates drives a binary purchase decision. The impact of rate changes can be quantified: if the Fed funds rate is 3.88% and 30-year mortgages at 6.13%, then the NAR’s Housing Affordability Index (HAI) will fall to around 104; in contrast, at a Fed fund rate of 3.38% and 30-year mortgage at 5.63%, HAI might be over 109. To put this in context, from 2018 through 2021, the HAI ran from about 140 to over 180 — highly affordable.
Either way you look at it, there is housing demand. If it isn’t met by purchase (e.g., too low an HAI), it will be met by rentals. If developers choose wisely within each market and location they serve, they can mix their investments between the two models and see sustained growth. Developers have to address the risk of inflationary impacts on their margins in a fashion they’ve not seen for some time. This puts pressure on them to acquire ready-to-develop land in the most opportunistic locations.
If investors can provide useful tracts to those developers, in the right locations, they should be positioned to make money independent of how interest rates swing.
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