Zonda’s economists, Tim Sullivan and Ali Wolf recently shared an update on the housing market. Here are some key takeaways:
Economic Backdrop
- The Fed - The Fed is designed to maintain price stability through strategic interest rate increases. This is a precise economic science, but conflicting government and private sector inflation data have made the Fed’s task particularly difficult. The lagging nature of inflation data has also caused The Fed to ease interest rates prematurely as new economic data is coming in stronger than expected.
- Inflation - Inflation is still too high—the Personal Consumption Expenditure is up 5.4% and the Consumer Price Index also shows an alarming 6% increase year-over-year. Evaluating core inflation without the noisiest factors like food or volatile energy pricing has revealed the largest contributor to the increase in costs is shelter, accounting for 70% of the increase.
- Unemployment - Even with employment back to pre-pandemic levels, unemployment still rose to 3.6% after 400,000 more jobseekers entered the market overall, indicating that the economy is still too hot and that The Fed needs to do more to slow it down.
Mortgage Rates Are Down
Investors looking for a safe place to put their money are putting it into government bonds, which is pushing yields and mortgage rates down to 6%. Only 20% of builders saw a positive response to these new rates in December forcing sellers of new homes to come down on home prices or negotiate fixed-rate buydowns in the high 4s or low 5s, however, in January and February, 50% of builders reported a more receptive home-buying market.
New Home Sales Are Up
Existing home sales are still down 34% year-over-year and 0.7% month-over-month, but new home sales have actually increased 13.5% month-over-month. Existing home sales have struggled because re-sellers tend to overprice their home due to its sentimental value, but buyers are unwilling to overpay for an old home in a market full of price cuts and incentives for new homes. This, in turn, should cause a continued demand for multifamily housing.
Housing Demographics
An interesting trend to note: some communities that were originally being developed for rental opportunities are now being converted to for-sale opportunities.
Supply Status
The market is returning to health as sales slow, so that supply and demand can realign. There is an 81% improvement in the cost of supplies, which is also helping restore builder confidence as fewer builders expect housing starts to be down this year. Single-family housing starts have been down as more families opt for cost-effective communal and multifamily housing over the last few decades.
It has always been difficult to bring new housing supply to markets like Los Angeles where the cost to develop is so high, but the low cost to develop is where Texas and Florida are beating out California markets. Nationally, lot supply is up but still significantly undersupplied.
The main question is the following: is housing “back” for good, and what does that mean for multifamily demand going forward? Ultimately, it is a waiting game as Fed policies play out in the economy.