Housing Market Sees Modest Growth Amid Rising Mortgage Rates
The US single-family homebuilding sector experienced a moderate upswing in December, driven by a 3.3% increase in housing starts to a seasonally adjusted annual rate of 1.050 million units. This growth, however, is expected to be short-lived due to the rising mortgage rates and an oversupply of new homes on the market.
Mortgage Rates Weigh on Homebuilding
Higher mortgage rates have been a significant obstacle for homebuilding, which had previously benefited from a scarcity of previously owned houses for sale. The average rate on the 30-year fixed-rate mortgage surpassed 7% this week, marking the first time since May. This surge is attributed to the rise in U.S. Treasury yields, fueled by economic resilience and investor concerns about President-elect Donald Trump’s proposed policies.
Federal Reserve’s Policy Easing Cycle
The Federal Reserve has reduced its projected interest rate cuts for this year to only two, down from the four estimated in September. The central bank has lowered its benchmark overnight interest rate by 100 basis points to the 4.25%-4.50% range. This easing cycle, which began in September, has had a mixed impact on the housing market.
Homebuilders’ Concerns
Despite initial optimism following Trump’s election victory, homebuilders are now worried about the potential consequences of the new administration’s immigration and trade policies. These concerns include higher prices for building materials and worker shortages at construction sites. The National Association of Home Builders/Wells Fargo housing market index remained unchanged in January, with builders citing high borrowing and construction costs as major obstacles.
Oversupply of Unsold New Homes
The inventory of unsold new homes has reached levels last seen in late 2007, indicating an oversupply in the market. Permits for future construction of single-family housing increased 1.6% to a rate of 992,000 units in December. However, experts warn that even if mortgage rates eventually fall, the elevated inventory of unsold new homes will limit the impact on building activity.
Expert Insights
According to Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, “The elevated level of inventory of unsold new homes on builders’ books suggests that any eventual upturn in demand will feed through only weakly to building activity.” This sentiment highlights the challenges facing the housing market in the coming months.
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