Why Lower Interest Rates are Not Boosting the Housing Market

Filed in Affordability, Economics, Housing Finance by on August 8, 2019 3 Comments
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Recent jolts to the economy stemming in part from an intensified trade war with China have worried markets and resulted in a significant decline in interest rates as investors have shifted from equity to bonds. Lower interest rates present an opportunity for the housing market, which has failed so far to respond energetically to this positive development due to prior housing affordability headwinds.

This analysis by NAHB Chief Economist Robert Dietz provides an overview of what is required for a more robust housing response to lower rates, including an increase in single-family permits.

The fact that home sales are not rising in response to lower mortgage interest rates is because rates are falling for the wrong reasons. These declines, while a positive for the cost of buying a home, are occurring due to the uncertainty produced by trade and growth concerns.

What does this lower interest rate environment mean for housing, and builders and remodelers? First, now is a good time to buy a home or finance a home improvement project, provided the right home is in inventory or a remodeler is available. Lack of entry-level single-family housing remains a challenging headwind for younger households trying to obtain homeownership, particularly due to lack of construction.

Second, while the costs of buying a home, developing land and building housing are now lower, caution is required by market participants because rates have declined on increased uncertainty. Tariffs and trade conflict not only raise the cost of specific goods, but also produce regional weakness in export-dependent regions, which in turn can affect local housing demand. This effect has been seen clearly in many Midwestern markets that, in addition to a spate of poor weather, have grappled with a weakening agriculture sector.

Third, a renewed focus on advocacy for improved home owner and renter housing affordability is required. The executive order from the White House on this subject is a good win to build on, particularly to make the argument at the local level of government where NIMBYism forces hurt younger households. Housing affordability needs to be a 2020 election issue.

Finally, current credit market conditions are a reminder of the typical role housing plays in business cycles. Housing often feels the pain first, and then leads the economy out of downturns, soft patches and recessions because low rates stimulate more housing construction. The Great Recession was a notable exception to this trend.

Given that low rates have returned to the marketplace but home construction has not yet responded in a significant way, progress must be made on other affordability challenges for housing to provide a lift to economic growth. In the meantime, solid levels of builder confidence suggest growth for single-family permits ahead.

Dietz provides further analysis in this Eye on Housing blog post.

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  1. David Koster says:

    While reduced mortgage rates most certainly reduce the cost of owning a home, albeit very slightly, I have no idea where the notion comes from that the cost of buying land, developing it, and building homes are now lower. Out here in the real world of small and medium sized builders there is no meaningful reduction in the rates that we pay, and in some cases they are rising as banks sniff out higher risk levels. Of course our hard costs of construction are still escalating at a rate far greater than inflation. I know NAHB means well, but sometimes I wonder if we are all in the same business.

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