War in Ukraine Adds to Inflation Concerns

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.

The Russian invasion of Ukraine is generating economic impacts for U.S. markets. In the short run, heightened economic uncertainty has reduced long-term interest rates by about 20 basis points, causing the 10-year Treasury and 30-year fixed mortgage interest rates to fall back.

Looking forward, a drawn-out conflict will increase inflation pressure for energy (particularly oil and natural gas) and food (specifically wheat). Higher oil and gas prices will only exacerbate the already rising costs of building materials in 2022. For example, prices for lumber and OSB have increased 241% and 168%, respectively, since late August. And prices for metals such as aluminum and nickel have already increased because of the conflict.

The Federal Reserve will begin raising the short-term federal funds rate on March 16. NAHB is forecasting a 25 basis-point increase. Although the Fed was considering a 50 basis-point move, the Ukraine war will likely dissuade the central bank from creating any market surprises. We now expect five 25 basis-point increases this year, which (combined with a tightening labor market) will push mortgage rates higher. Indeed, the job market surprised in February with a 678,000 job gain while the unemployment rate fell to 3.8%. Higher rates and increasing home prices will continue to reduce housing affordability in 2022. In fact, new NAHB estimates indicate that for every $1,000 increase in home price, almost 118,000 households are priced out of the market. New home sales dipped in January, likely because of growing affordability concerns. Sales contracts fell 4.5% to an annual rate of 801,000. The January 2022 pace was 19% lower than the pace of sales in January 2021. However, much of that decline was strategic pacing by builders because of ongoing supply-chain issues.

As conditions become increasingly challenging for home buyers, demand will continue to grow for multifamily construction. In fact, the three-month absorption rate for new apartments in the third quarter of 2021 climbed to 75% — the best reading since 2005.

But while suburban and high-rise apartment construction continues to grow, the “missing middle” remains missing. Because of zoning issues and regulatory burdens, 2- to 4-unit multifamily production was flat in 2021 with just 12,000 units started, while the rest of the home building industry was posting strong gains.