Gianni Martinez, 31, thought buying an apartment would be pretty easy.
Thanks to the Federal Reserve’s efforts to curb inflation, mortgage rates are currently around 7 percent – the highest since 2007. Central bankers have raised their official interest rate to around 5 percent over the past 15 months, which translates into higher borrowing costs reflected throughout the economy.
Mr. Martinez, a technician, expected this to cool down the Miami real estate market. Instead, he finds himself in fierce competition for one- to two-bedroom apartments near the sea. He’s made seven or eight offers and is willing to pay 25 percent, but he keeps losing, often because people pay cash instead of taking out an expensive mortgage.
“With interest rates at 7 percent, I didn’t think it would be that competitive — but for cash buyers, that doesn’t matter,” Martinez said, noting that he’s competing with foreign bidders and other young people who show up with their parents in tow Opening homes, suggesting that mom or dad might help foot the bill.
“If there’s an offer with the correct price, that’s amazing,” he said.
The Fed’s rate hikes are aimed at slowing the US economy, including by containing the housing market, in an attempt to control inflation. These steps initially had a rapid impact and led to a weakening of interest-rate-sensitive parts of the economy: the real estate markets across the United States declined significantly last year. But this cooling seems to be working.
Home prices fell nationwide in late 2022, but in recent months they’ve started to rebound, a resurgence as the market has proved particularly strong in southern cities like Miami, Tampa and Charlotte. A new dataset, due to be released on Tuesday, will show whether this trend will continue. Last week’s figures showed that national housing starts rose better-than-expected in May, posting the sharpest rise since 2016, as building applications also picked up.
Residential construction appears to be gaining momentum again. Rising house prices will not support official inflation figures – these are based on rental costs and not the cost of buying housing. But the recovery is a sign of how difficult it is for the Fed to rein in economic momentum when the labor market remains strong and consumer balance sheets are generally healthier than before the pandemic.
“It’s another data point: Things aren’t cooling as much as they thought,” said Kathy Bostjancic, chief economist at Nationwide Mutual. In fact, new housing construction is “telling us something about where the economy is going, which suggests things may be picking up.”
That could have policy implications: Fed officials believe the economy will have to spend some time growing at a rate below its full potential for inflation to cool off fully. In a weak economy, consumers don’t want to buy as much, making it difficult for businesses to charge as much.
The question is whether the economy can slow down enough when the housing market stabilizes or even recovers, causing homebuilders to become more optimistic, builders to hire workers and homeowners to feel the mental boost that comes with rising home equity.
So far, at least the Fed chair seemed unconcerned.
“The real estate sector has flattened nationwide and may have risen a little, but at a much lower level than before,” Fed Chair Jerome H. Powell told lawmakers last week, adding a day later, “You me actually saw that it has now bottomed out.”
Higher interest rates have helped significantly slow existing home sales, he says, although two broad secular trends are fueling demand for new homes.
Millennials – America’s largest generation – are in their late 20s and early 30s, the prime years to move out on your own and attempt home-buying.
And the shift to remote work during the pandemic appears to have spurred people who might otherwise have stayed with roommates or parents to live alone, according to a recent study co-authored by Adam Ozimek, chief economist at the Economic Innovation Group .
“Remote working means working from home for a lot of people,” Mr. Ozimek said. “It really adds value to the space.”
The available housing supply is now scarce. This is partly due to the Fed. Many people refinanced their mortgages when interest rates were bottoming in 2020 and 2021, and now they are reluctant to sell and lose those cheap mortgages.
“The most surprising thing about this real estate market is how the rise in interest rates has affected supply and demand pretty much equally,” said Daryl Fairweather, chief economist at Redfin. The drop in demand is likely to have been a little more severe, she said, but builders have benefited from a “significant lack of supply”.
As young people continue to bid on homes and supplies become scarce, prices and construction are making a surprise comeback.
“Demand stayed better there than we expected for this first-time buyer,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association.
Ms Bostjancic said the latest housing data is likely to push the Fed towards higher interest rates. Officials suspended their rate hikes in June after 10 straight hikes, but have hinted they could raise them twice more in 2023, including at their meeting next month.
The glimmer of hope for the Fed is that housing prices will not have a direct impact on inflation. America’s pricing systems use rents to calculate housing costs because they’re trying to capture the cost of consumption. Buying a home is partly a financial investment.
Rent growth has been stagnant for months – slowly feeding into official inflation data as tenants renew their leases.
“Rental growth is taking a nice, deep breath,” said Igor Popov, chief economist at Apartment List. “Right now it doesn’t feel like there’s much new Heat.”
Still, at least one Fed official fears that the housing market’s rebound may limit the extent of this slowdown. As home prices rise, some investors and landlords may decide to either charge more or switch from renting to buying and selling homes — limiting the rental supply.
“A recovery in the housing market raises the question of how sustainable these lower rent increases will be,” Christopher Waller, a Fed governor, said in a speech last month.
He said the rebound “even with significantly higher mortgage rates” raises questions “whether the benefits from slowing rent increases will last as long as we expected.”