I noted the other day that the Fed has had no effect on inflation. However, the Fed is really good at one thing: making interest rates go up. When the Fed cranks up the reserve rate, interest rates do indeed go up. And the housing market naturally craters:
Housing starts went down another 100,000 in July. That's a drop of about half a million since the Fed started raising rates. In the past this has been a sign of impending recession, but not this time. So far.
This is the opposite of "crumbling" or "cratering", at least when it comes to the housing market.
This will further constrict supply (we've already seen it!), and continue to raise prices.
I think what you meant was "housing construction continues to tank", but since prices are so high for new construction it's not really the end of the world for builders.
Ok, it's really a cratering of the home building market.
Is it really a cratering if home builders' profit margins haven't cratered?
https://www.probuilder.com/home-builder-profits-reached-record-high-2022-despite-affordability-challenges
That one ends in 2022 but shows a trend that isn't caused by interest rates - it's caused by the massive undersupply (and exploding home prices).
Here's one where it shows a distribution of profit margins in 2023 and the mode is still 10-15%. https://blog.associationofprofessionalbuilders.com/how-much-is-a-builders-margin
And in 2024, homebuilding revenue was still on the rise: https://www.nationalmortgagenews.com/list/homebuilders-see-profits-grow-in-challenging-housing-market
Not cratering.
Kevin is clearly talking about new housing supply and likely the jobs that support new construction.
Your argument that revenues and profit margins are not cratering is an interesting but completely different argument.
Insisting that new constuction isnt falling because profit margins are stable obviously makes no sense.
I’m wondering how the new rules regarding real estate commissions is going to affect housing prices. Has to drive them down a bit I would think.
I see Drum has become an Erdoganist.... with all the logical coherency of Erdoganism.
Why do we listen to a bigot?
I think you have the causation slightly off. The true cause of slowing starts is the slowing of demand, as reflected in housing prices. The slowing of demand can be caused by several things, only one of which is rising Fed target rate. Housing starts and demand can still increase even while the Fed rate is increasing and the historical record reflects this.
Not just slow demand...companies will take out loans to build new housing then pay them off with the houses sell. Raising rates also increases the borrowing costs, so less profit in building homes.
I thinks there's a lot of pent up demand, but housing costs (prices plus cost of mortgage) are too high for many--not to mention competition with hedge funds who want to rent those houses to what would have been first time buyers.
Yeah, that's true, but so long as demand remains strong, the borrowing costs can be absorbed by higher selling prices and profits remain stable.
No, it can't, because demand limits on its ability to remain in the market.
Builders can't sit on houses that take longer to sell;
Buyers can only afford so much.
Even so, you can look at a chart to see that as rates rise, demand not only persisted but increased.
Yes, there's a limit, but KD's causative claim is that the Fed rate increase will crater demand.
Most of us lived through the 80s, right? Volker obliged continued growing demand by raising rates until the market could no longer tolerate it.
Which brings us back to whether or not the Fed can stop inflation, to which most macro economists would say that Volker did, in fact, stop inflation, but at the expense of the economy, by raising the Fed rate.
Even Paul Krugman has said this repeatedly.
Demand comes in a couple parts, but since the vast majority of housing is paid for via credit, raising interest rates literally reduces the market directly.
No, it doesn't. If incomes keep up, people will pay for higher mortgages.
This is just a wild guess that people will be willing to spend more on housing instead of on the thousand other things that they could spend their higher income on.
Housing is not price inelastic as you are implying.
Mortgage rates had their post-1990s peak in Oct '23 and have come down more than 1 pt. since. Housing inventory bottomed in Nov '22 and has grown more that 2.5 times since.
So for the record, it's been almost a year since mortgage rates have been going up and almost two years since we've had the extreme housing shortage everyone is talking about.
Still, housing affordability is a problem and young folks could use help. Fed should cut its rates and mortgage rates will drop further. The Kamunist plan to help first-time homebuyers also will provide a much-needed boost and spur new construction that will likely lead to good economic outcomes for years. Kamunism rules!
NO! Just NO!
Not Kanumisn...but Kamenomics....and that works better with The Muppets song.
I have a 2.625% rate on my 15 year mortgage. I’m good.
There’s a nice apartment complex under construction nearby. $1500 to $2000 a month for 2 and 3 bedroom. Seems fine.
That's great. For you.
Not for someone making $20 an hour.
Just for kicks, maybe look at how median prices have changed from a year ago, over time: https://fred.stlouisfed.org/graph/?g=1sB0g
Do you see a bottom or do you see prices continuing to drop?
Percent change from a year earlier introduces significant lag and obscures the "when". Look at the raw prices. From Q2-2020 to Q2-2022 prices rose 38%. Since then, prices have declined somewhat. Will the decline continue? Will they start rising again? Who knows? Anecdotally, two years ago existing houses sold for above asking price, and bidding wars were common. Demand exceeded the supply. This is no longer the case. In my neighborhood I've seen more houses sold this summer than in the previous several years combined.
Historically, high interest rates put downward pressure on prices, but past performance is no guarantee of future results.
Y/Y isn't exactly a lag; it's a means erase m/m volatility without doing a backward rolling average.
Notably, the chart shows distinct indications of when the market has hit bottom. We've had 5 straight quarters of Y/Y price declines but we haven't hit a recession. That looks like a soft landing in comparison to past trends.
A backward rolling average is exactly what Y/Y is. It's the cumulative change over the preceding 12 months. This is why there's a lag - because you're looking backward 12 months.
Also, if you look at the prices, there is a definite trend downward in those 5 quarters. It's an open question whether this indicates and actual trend downward or is just noise.
All those electricians that would be wiring houses are doing solar farms and datacenters instead. In other words, infrastructure is more than filling the housing starts role.
The Republicans may think it's all "fixed" to make Biden and Dems look good, but there is a lot of evidence that now is the time to reduce rates some. It doesn't have to be a lot or big sudden reductions, but over some time they need to be eased.