What is happening in the housing market?

Gianni Martinez, 31, thinks it would be very easy to buy an apartment.

Mortgage rates are now hovering around 7 per cent – their highest level since 2007 – thanks to the Fed’s efforts to tame inflation. Central bankers have raised their official policy rate to about 5 percent over the past 15 months, driving up borrowing costs across the economy.

Mr. Martinez, a tech worker, predicted this would calm down real estate in Miami. But instead, he finds himself in stiff competition for one- to two-bedroom apartments near the ocean. He’s made seven or eight offers and is willing to take 25 percent off, but he keeps losing out, mostly to people who pay cash rather than take out an expensive mortgage.

“Given interest rates of 7 per cent, I didn’t think it would be that competitive — but that doesn’t matter to cash buyers,” Mr. Martinez said, noting that he is competing with foreign bidders and other young people who turn up to open homes with their parents in tow, Suggesting that mom or dad might help foot the bill.

“When there’s a properly priced listing, it’s a madhouse,” he said.

Federal interest rate increases are intended to slow the US economy – in part by constraining the housing market – to try to control inflation. These moves worked quickly at first to weaken interest-sensitive parts of the economy: housing markets across the US fell significantly last year. But this calm appears to be cracking.

Home prices fell nationally in late 2022, but have begun to rebound in recent months, a rebound that came after the market proved particularly strong in Southern cities including Miami, Tampa and Charlotte. New data due for release on Tuesday will show if this trend has continued. Figures released last week showed that national housing starts unexpectedly rose in May, jumping by the most since 2016, with homebuilding orders also increasing.

The housing sector appears to be finding renewed momentum. Rising home prices will not support official inflation figures – those that are based on rent rather than housing costs purchased. But the recovery is a sign of how difficult it will prove for the Federal Reserve to rein in momentum in the economy at a time when the labor market remains strong and consumer balance sheets are generally healthier than they were before the pandemic.

“It’s another data point: Things aren’t calming down as much as they thought,” said Kathy Bostancic, chief economist at Nationwide Mutual. In fact, new housing construction “tells us something about the direction the economy is headed, so this suggests that things are likely to improve.”

That could be important for policy: Fed officials believe the economy needs to take some time to grow below its full potential to fully dampen inflation. In a weak economy, consumers don’t want to buy as much, so companies struggle to charge as much.

The question is whether the economy can slow enough when real estate has leveled off or even warmed up, leaving home builders feeling more optimistic, and construction companies that hire workers and homeowners feeling the mental boost that comes with rising home ownership.

So far, the Fed leader has seemed, at least, unperturbed.

Jerome H. said: Powell, chairman of the Federal Reserve, told lawmakers last week, “The housing sector has deteriorated nationally, it may have gone up a little bit, but at a much lower level than where it was,” we’ve kind of seen bottoming out now.

Higher rates have helped reduce existing home sales significantly, to an extent, even though demand for new homes is boosted by two sweeping long-term trends.

Millennials—the largest generation in America—are in their late 20s and early 30s, which are the peak years for going out on their own and trying to buy a home.

And the shift to remote work during the pandemic appears to have motivated people who might otherwise have stayed with roommates or parents to live on their own, according to recent research co-written by Adam Ozemek, chief economist at the Economic Innovation Group.

“Telecommuting means working from home for a lot of people,” Ozemick said. “This really increases the value of the space.”

The supply of available housing, meanwhile, has been tight. This is also due in part to the Fed. Many people refinanced their mortgages when interest rates were at their lowest in 2020 and 2021, and now they are reluctant to sell and lose those cheap mortgages.

“The most surprising thing about this housing market is how the increase in interest rates has affected supply and demand pretty much evenly,” said Daryl Fairweather, chief economist at Redfin. The downturn in demand may have been a little more severe, she said, but builders are benefiting from an “extreme supply shortfall”.

With young people still bidding on homes and inventory running short, prices and construction are making a sudden comeback.

“Demand has held up there better than we would have anticipated for this first-time buyer,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association.

Ms. Postjancic said the latest housing data is likely to push the Fed towards higher rates. Officials paused their price moves in June after 10 consecutive hikes, but have proposed raising them twice more in 2023, including at their meeting next month.

If there is an upside to the Fed, it is that home prices will not directly fuel inflation. US price measures use rents to calculate housing costs because they attempt to determine the cost of consumption. Buying a home is, in part, a financial investment.

Rent growth has stalled for months – which is slowly feeding into official inflation data as people renew their leases.

“Rent growth takes a nice deep breath,” said Igor Popov, chief economist at Apartment List. “At the moment, I don’t feel like there’s a lot of new heat.”

Still, at least one Fed official is concerned that the recovery in the housing sector may limit the scope of this slowdown. As housing prices rise, some investors and landlords can decide to either increase fees or shift from renting, buying and selling homes – to reduce the supply of rentals.

“The recovery in the housing market raises questions about how long these low rent increases will last,” Fed Governor Christopher Waller said in a speech last month.

He said the recovery “even as mortgage rates have risen significantly” has raised questions “about whether the benefit from a slowdown in rent increases will last as long as we expected”.