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Asking Rents Jump Amid ‘Very, Very Difficult’ US Housing Situation
Earlier this month, during his testimony on Capitol Hill, Jerome Powell said the US housing market's "in a very, very difficult situation."
He conceded the Fed didn't fully anticipate the potential for rate hikes to create an acute shortage of resale supply, thereby underpinning prices that might've otherwise cooled in the face of constrained demand. In that respect (and several other respects besides), rate hikes have been inflationary.
Everyone generally assumes the supply shortage will abat
We cannot simply focus on the demand side when talking about the impact of higher rates on the housing market. As JL and I have mulled over, pushing up interest rates tends to reduce the supply of new construction, especially in the multifamily home market. It should tend to inhibit spec building of single family homes as well. It will not get better now that new supply projects started back when rates were low are completed. How will that be offset?
On another note, Powell was a master of understatement when he said that the Fed did not “fully anticipate the potential for rate hikes” on the housing market. Try dead wrong. Models are rarely stagnant, though academics and most policy makers often seem to think that they are.
Add banks’ new aversion to CRE and rising credit stress in MFD CRE, and financing for new MFD projects is tighter than the generic yield curve suggests. Non-banks will provide some financing, but at rates steep enough that few new projects will pencil out. Even fewer in Sunbelt markets where there is at least a year of recent projects’ oversupply to be digested by both renters and investors.
I don’t have a clear sense what this means for shelter CPI in coming months.
But I am liking MFD REITs more and more.