Seeing the Effects of Higher Interest Rates on Housing Supply
June 21, 2023 | James Sprow | Blue Vault
Fewer builders are starting new homes amid high prices for materials and loans, and the trends are threatening housing shortages. The Fed is fighting inflation today at the cost of boosting inflation in the future. High interest rates hurt construction because they make it more expensive for developers to build. They also make it more expensive for households to buy homes, hitting demand for new housing and leading some developers to delay projects.
New building permits for all private housing in the U.S. fell more than 12% in May from a year earlier. Permits for single family residences were down 13.2% year-over-year and permits for multifamily developments were down 11.9% year-over-year.
Just above one-fourth of adults (27 percent) rented their home in 2022. Lower-income and Black and Hispanic adults were disproportionately likely to rent as opposed to own. Additionally, those who live in low- and moderate-income neighborhoods or who live in metro areas were more likely to be renters. And it’s more expensive than ever to do so. Many factors are making it more expensive to rent, including the higher costs of maintenance for landlords, lack of inventory of vacant rental properties, expiring rent freezes and discounts, and barriers to home ownership such as higher mortgage rates and lower inventories of affordable existing homes.
Efforts by the Federal Reserve to reduce inflation threaten to choke off construction and worsen housing shortages. The irony is that those efforts could push up inflation in the years ahead through higher rents and home prices.
Some economists and real-estate developers expect building activity to drop further if rates stay high. The Fed held interest rates steady in June, but two more rate increases are expected this year, which would lift them to a 22-year high.
In the U.S., shelter accounts for about a third of the consumer-price index and was a key force behind rising prices over the past year. In high-cost cities, where households often spend more than a third of their income on rent, the impact has been greater.
As quoted in the Wall Street Journal, “Shelter is the 800-pound gorilla within the CPI,” said Sam Khater, chief economist at Freddie Mac. “More and more of the problem that [the Fed is] facing is related to housing,” he said. “And that problem is something that they cannot tackle on their own at all.”
Sources:
Wall Street Journal; U.S. Census Bureau; Federal Reserve
