February 10, 2023

Hi. I’m Lauren Saidel-Baker. And thank you so much for joining us for this episode of ITR Economics TrendsTalk. Today, let’s talk about the housing market. Now, you’ve probably seen our updated expectations. Single family housing starts are currently contracting, and there are two big reasons for that, but they all come back to affordability. On the one hand, the housing market was just red-hot in 2021 and into 2022, so we saw accelerating rise in home prices. Those more expensive homes become, well, yes, less affordable, so it’s harder, especially for those first time home buyers to step into that first home. Now, the other reason for affordability constraints comes back to the Federal Reserve. We’ve talked a lot about fed policy and rising interest rates, so I won’t belabor that point today, but I do want to touch on what mortgage rates specifically have done and really what we should expect going forward into this busy spring selling season.

So you’ve probably read some very frothy headlines about mortgage rates lately. I know I’ve seen some that scream things like mortgage rates have more than doubled in the past X number of months, and well, that’s true. Let’s keep this in context. Mortgage rates have doubled from less than 3% on average to about 6%, so that’s a very different type of doubling than if we had, say, started at 6% and mortgage rates rose to 12%. And in fact, it seems like that high might be forming. We have seen a little bit of tick down in some rates in the past couple of months, so context here is going to be very important for our expectations going forward. I like to compare myself and tell a story of my own home purchasing experience. It was quite a while ago now about a decade, but when I bought my first home, we looked at the typical things, the price, the wallpaper, what we’d need to do to fix this place up and get it into the shape we wanted to live in.

But really what we were looking at was that monthly mortgage payment, and I was incredibly fortunate. I was buying a house at a great time. My first mortgage rate was something like three and a quarter percent. That was astounding, especially for a young first-time home buyer with very limited credit. So what do you do when you’re a young first-time home buyer with limited credit and three and a quarter percent rate? Well, you go talk to your parents, so I said, “Mom and dad, look at this great rate I got. What was your first mortgage rate?” And they looked me dead in the eye and they said it was 16%, but the craziest thing at that point in their lives, they were thrilled to get that 16% mortgage rate as well because they wanted that home. They could afford that monthly payment. So there’s a lot more that goes into this calculus for home buyers than just the rate itself.

We probably will see another rise or two coming out of the Fed. So that will have some implications as we run into this, again, busy spring selling season that’s going to set the pace for what the housing market will do in 2023, but looking ahead, let’s keep in mind the factors that are now behind us, so there are some risks. Further, fed action greater than increased rise in interest rates will push up mortgage rates, and we’ll continue to strain that affordability. We’re also seeing some unusual relationships in the housing market with these rapid rise. It’s really the pace of rise in interest rates that we’re talking about here. We see things like existing homeowners maybe a little bit more reluctant to sell. If I have a three and a quarter percent mortgage rate right now, why would I sell that house and buy a new equivalent house if my new mortgage rate would say double to six or even higher percent rate?

So we have to reshape our expectations. We’re looking for a low to form in the not too distant future in the housing market and for construction to start recovering on the other end. Now, the non-residential sector does tend to lag residential housing starts, so we have a little bit more forward-looking visibility on that side of the business. Still seeing some rise in that space. Look for this softness to manifest later this year with just a little bit more delay to the housing market. But whatever happens going forward, we will report it here at ITR, so please check back in with us. Thank you so much for joining me today for this episode of ITR TrendsTalk. I’m Lauren Saidel-Baker. Let’s talk again soon.