Rebuilding Housing

An upturn in residential activity may be the next inflation challenge.

Last year, tremors in the residential real estate sector added to fears of an imminent recession. During the pandemic, working and schooling from home accelerated decisions to purchase property. Demand for houses surged faster than supply could respond. But spiking prices and rising interest rates caused the market to cool rapidly.

Housing’s decline was one of the few examples of monetary policy working as intended: the higher cost of financing impaired affordability and slowed purchase activity. Though the market was due to cool down, a rapid reversion carried the risk of pain and spillover across the broader economy.

Recent measures out of the housing market show an adaptation to higher borrowing costs. Housing starts bounced by a startling 21.7% from April to May, while new home sales grew 12.2% in the same month. House price indexes (HPIs) through April are showing the beginnings of growth after a year of no appreciation. Mortgage interest rates are rangebound at around 7%, and buyers are not deterred.

Inventories of homes remain constrained. The Census Bureau’s estimated homeowner vacancy rate is holding at a record low of 0.8%. The supply of vacant homes for sale has fallen to levels last seen in 1979 when the nation was 100 million people smaller. A sluggish building cycle over the past decade kept supplies low. Today’s homeowners holding low mortgage rates are unable or unwilling to incur the higher financing cost of upgrading their homes.

US House Price Indexes