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As Rates Fall, What Will Become Of US Housing?
If you want to argue that orthodoxy has it backwards when it comes to rates and US home prices, you have to make the case that the demand boost from a given decline in financing costs won't overwhelm any accompanying increase in supply from a loosening of the so-called "golden handcuffs" dynamic.
There are a number of vectors on which the persistence of high rates is arguably contributing to inflation in the US. The housing market's the quintessential example. Market rates remain far above the
Real housing costs will decline over the next 3-5 years. Don’t expect a quick fix though. 30 yr rates should be 5% if spreads were average. They are 6% now. If fed funds get to neutral, thats 200 lower, with a steepening curve, 30 yr
rates should be 4%.
For apartments, I think lower rates will make more projects pencil out and eventually lead to more starts. It will take time, many banks are still leery of CRE lending, permitting takes time, etc. Starts peaking 1H24, maybe will fall for one or two years before rising again.
For houses, I think first we see the effect of lower mortgage rates on demand and supply of existing houses, whatever it turns out to be, then we see the new house supply accelerate given the time lags for development.
Neither will address the actual shortage, which is “affordable” housing. As discussed before, there is no shortage of total housing – in the US, housing units/capita are far higher now than ever before.
For people who need “affordable” housing, I think incentives and funding for subsidized housing will be a lot more effective than generalized housing stimulus. Just not a lot of $50K/yr income households buying even the lower-end “people self-storage” type of new house for $400K+, or renting in the Class A/B new apartment “communities” for $1200/mo+.
maybe there’s something else to add to the pot …
If new construction (single family)is part of solution, where is the available land to build upon (or what land gets repurposed)? Urban growth boundaries and increased density aside, sooner or later forests, wetlands and farmlands will be repurposed with a myriad of justifications – but long term consequences build up. Or, maybe outdated commercial properties, like a San Antonio mall, gets repurposed for innovative single / multi living (that one was to data centers). The constraint that Americans will struggle to accept and honor, especially here in west, – available desirable buildable land … and there’s little land left to steal.
Rates, mortgages and incentives cannot produce more land … (one heretical idea: repurpose all urban golf courses for houses)
I think it will depend on local conditions. How much developable land is there?
In urban areas, housing development has to be mostly apartments, rowhouses, condos, townhouses; land cost is simply too high and land too scarce for new single family houses to move the needle – and new SFH will be high priced so irrelevant to the affordable housing shortage.
Developers will of course push for nature and farmland alike to be paved over in the name of “housing”, without mentioning that what they’ll build in those new treeless suburbs will be totally out of reach for the people who can’t afford housing today.
Random bit of feedback: I quite like the formatting on the “Still Subdued” chart.