Gianni Martinez, 31, thought buying an apartment would be easy enough.
Mortgage rates are now hovering around 7 percent — the highest since 2007 — thanks to the Federal Reserve’s efforts to control inflation. Central bankers have raised their official policy rate by nearly 5 percent over the past 15 months, raising the cost of borrowing across the economy.
Mr. Martinez, a tech worker, hoped it would make Miami real estate cooler. But instead, he is finding himself in stiff competition for one- to two-bedroom apartments near the ocean. He’s made seven or eight offers and is willing to put 25 percent down, but he often loses out to people paying cash instead of taking on a costlier mortgage.
“Because of the interest rates at 7 per cent, I didn’t think it would be so competitive – but for cash buyers it doesn’t matter,” said Mr Martinez, noting that he was in talks with foreign bidders and other young up-and-comers. Are competing with their parents for open house, suggesting that Mom or Dad can help pay the bills.
“When there’s a true price list, it’s a madhouse,” he said.
The Fed’s rate hikes are aimed at slowing the US economy – partly by restraining the housing market – in an effort to get inflation under control. Those moves first acted quickly to weaken interest-sensitive parts of the economy: Housing markets across the United States retreated significantly last year. But that coolness seems to be breaking.
Home prices fell nationally in late 2022, but have begun to rebound in recent months, a revival that has brought the market proved to be particularly strong in southern cities including Miami, Tampa and Charlotte. The latest data to be released on Tuesday will show whether this trend continues. Data last week showed that national housing construction unexpectedly increased in May, the most since 2016, as applications to build homes rose.
There seems to be a new momentum in housing construction. Rising house prices will not boost official inflation figures – these are based on rental rather than the cost of purchased housing. But the revival is a sign of how difficult it is proving for the Fed to curb momentum in the economy at a time when the labor market remains strong and consumer balance sheets are generally healthier than before the pandemic.
“Here’s another data point: Things are not cooling off as much as they thought,” said Cathy Bostjanic, chief economist at Nationwide Mutual. In fact, new housing construction “tells us which direction the economy is headed, so it shows that things are potentially headed up.”
This could matter for policy: Fed officials believe the economy needs to take some time to grow at less than its full potential in order to fully quell inflation. In a weak economy, consumers don’t want to buy as much, so companies struggle to charge as much.
The question is whether the economy can slow enough when real estate is stabilizing or even heating back up, going Homebuilders feeling more optimisticConstruction companies hiring workers And homeowners are feeling the mental boost that comes with increased home equity.
So far, Fed leaders, at least, haven’t looked worried.
Fed Chairman Jerome H. Powell told lawmakers last week, “Nationally the housing sector has flattened, and is probably up a little bit, but at a much lower level than where it was.” In fact I have seen it reach a low point now.”
Higher rates have helped in reducing sales to a great extent existing homeAccording to him, however, demand for new homes is being fueled by two broad long-term trends.
Millennials — America’s largest generation — in their late 20s and early 30s, are peak years for moving out on their own and attempting to buy a home.
And it seems the shift to remote work during the pandemic has prompted people who might otherwise have lived with roommates or parents to live alone, depending on Recent research co-authored By Adam Ozimek, Chief Economist, Economic Innovation Group.
“Remote work means working from home for a lot of people,” Mr. Ozimek said. “That really increases the value of the space.”
Meanwhile, the available housing supply has been tight. This is also partly due to the Fed. Many people refinanced their mortgages when interest rates were lower in 2020 and 2021, and are now reluctant to sell and lose those cheap mortgages.
“One of the most surprising things about this housing market is how the rise in interest rates has affected supply and demand alike,” said Daryl Fairweather, chief economist at Redfin. The shortfall in demand was perhaps a bit more acute, he said, but builders are benefiting from a “severe supply crunch”.
As young people continue to bid on homes and inventory dwindles, prices and construction are making a surprising comeback.
“Demand for first-time buyers is much better than we expected,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association.
Ms Bostjancic said the recent housing data would likely push the Fed towards higher rates. Officials paused rate hikes in June after 10 consecutive hikes, but have suggested they could raise them twice more in 2023, including at next month’s meeting.
If there is any silver lining for the Fed, it is that home prices will not directly impact inflation. US price measurements use rents to calculate housing costs because they try to capture the cost of consumption. Buying a home is, to some extent, a financial investment.
Rent increases have stalled for several months now – which is slowly being factored into official inflation data as people renew leases.
“Rent growth is taking a good, deep breath,” said Igor Popov, chief economist at ApartmentList. “Right now, it doesn’t seem like there’s much new hotness.”
Still, at least one Fed official has expressed concern that the housing boom could limit the scope of that downturn. As house prices rise, some investors and landlords may decide to either charge higher fees or curtail the rental supply by renting out homes and buying and selling them instead.
Fed Governor Christopher Waller said, “The boom in the housing market is raising questions about how long the low rent increase will last.” in a speech last month.
He said the boom “even with significantly higher mortgage rates” raised the question of whether “the gains from slower rent growth would last as long as we were hoping for.”
