NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.
The combination of higher home prices, rising construction costs and moderately higher interest rates will exacerbate housing affordability conditions and increasingly push prospective buyers out of the market in the coming months.
Although economic growth is going to post the best year since 1984, that expansion has come about because of significant monetary and fiscal policy stimulus.
As supply-chain issues persist while the economy attempts to build on the post-2020 rebound, the expansion will become increasingly uneven. The first example of this variability was seen in the third quarter GDP data. Real GDP expanded by only 2% — noticeably less than what was forecasted earlier in the year and largely because of the rise of the delta variant.
The labor market is showing signs of overheating as well. There are more open jobs than there are unemployed workers available because of declines in the labor force participation rate. Jobs gains were solid in October, as payroll employment increased by 531,000. The unemployment rate fell to 4.6%, and further declines are expected. With clear signs of rising material prices and expected wage gains from a hot labor market, the Federal Reserve is reducing its accommodative monetary policy stance.
While the federal funds rate is being held near 0%, the Fed has announced the beginning of tapering, or reducing, its purchases of mortgage-backed securities and Treasuries. This process is expected to end by mid-2022, during which time interest rates should gradually increase.
Inflation data show why the Fed is pulling back on stimulus: Year-over-year consumer inflation in October was up 6.2% — the strongest reading in 30 years. Moreover, the October Producer Price Index recorded its fastest pace in 11 years with an 8.6% year-over-year gain for wholesale prices. Additional PPI data revealed that the prices of all inputs, including energy, used for residential construction purposes has increased 14.5% year to date in 2021 — eight times faster than they did in 2020.
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