Build It And They Will Buy. For Now, Anyway

US housing starts are resilient in the face of surging mortgage rates. And that shouldn’t surprise anyone.

Starts ran at a 1.793 million rate in March, up 0.3% from upwardly revised February levels (figure below), data out Tuesday showed.

That nearly matched the most optimistic guess from 57 economists. It was also the briskest pace since summer 2006.

The highest estimate was 1.8 million, the lowest 1.6 million.

Notably, the beat was skewed towards multifamily construction. Single-family starts, permits and completions all fell, but the pace of single-family starts was above 1 million — for the 20th consecutive month (figure below).

The data came as mortgage rates touched 5% for the first time in a decade. A gauge of builder sentiment fell to the lowest since September this month while remaining above pre-COVID levels.

Deep-pocketed investors are gradually crowding out individuals and families. Redfin data showed investors bought a record 18.4% of US homes sold in Q4, three quarters of which were purchased in cash. That’s making it more difficult for average people to afford a home.

Read more: As Mortgage Rates Soar, Rich Investors Corner Market With Cash

If you’re wondering whether higher rates “should” be impacting starts already, the answer is “no.” When the market is tight, builders will build.

“A 100bps increase in mortgage rates slows housing starts by 13% when the housing vacancy rate is above 2% but starts are essentially unresponsive to changes in mortgage rates when the vacancy rate is below 1%,” Goldman said Monday. The figure on the right (below) illustrates the point.

“When housing markets are tight, like they are today, homebuilders are likely to keep building because they have little fear that homes will sit vacant after completion,” Goldman went on to write, in the same note. The bank sees starts totaling 1.7 million in 2022, up 5%.

Measures of backlogs remained very elevated in March, Tuesday’s data showed. Until supply catches up, it’s premature to call any tops.

That said, I’d make two simple (and related) observations. First, for average families, the run up in prices (and now the surge in rates) may mean buying isn’t desirable even if there’s something they can afford. For example, have a look at listings for between $250,000 and $400,000 in third-tier US cities. What you’ll discover are homes that, in many cases, wouldn’t be any semblance of aspirational for a family currently renting a reasonably spacious, nice apartment. There’s very little incentive for a family of modest financial means to burn up their life savings on a home that would’ve cost less than $200,000 pre-pandemic. Simply put, such homes aren’t very nice. Home buying is supposed to be a watershed moment in people’s lives, not a depressing experience wherein the kids start saying uncomfortable things like, “We liked the apartment better.”

Second, for families (or individuals) with adequate financial resources, the situation isn’t particularly vexing just yet. It’s just a matter of not getting what you think you “should” for the money. $600,000 doesn’t get you a mini-mansion anymore. In large cities, it barely gets you a decent two bedroom.

Extending that a bit further (and paraphrasing a handful of conversations I’ve had with acquaintances), young professionals with $200,000 salaries, six-figure down payments and near perfect credit aren’t enamored with the idea that they should have to “settle.” Two years ago, such borrowers were shopping for grandiose four bedrooms with pools and small theaters. Now, they’re pondering the prospect of more “humble” abodes. “Humble” is a very relative term in this context (hence the scare quotes), but suffice to say that based on brief chats I’ve had personally, there’s a sense among many young professionals that what the mortgage bankers are telling them they can afford is out of proportion with their objectively fortuitous economic circumstances.

Crocodile tears, I know. But the point isn’t “pity the future millionaires.” Rather, the point is that the market is hopelessly distorted.

Those are (mostly) anecdotal observations, but I try to spice things up when I can. Otherwise, what’s my value add?