What's new:
U.S. real GDP growth increased to an annualized rate of 4.9 percent in the third quarter, according to today’s “advance” estimate from the U.S. Bureau of Economic Analysis, marking the fifth consecutive quarter of positive economic growth and the highest rate since the third quarter of 2021.
This continued growth of economic output highlights the resilience of the U.S. economy amidst the Federal Reserve’s aggressive series of interest rate hikes over the past year and half – the effective federal funds rate rose from 0.08 percent in February 2022 to 5.33 percent in September 2023 – and increases the odds of a soft landing.
The labor market has also held strong, despite showing some signs of loosening. The unemployment rate ticked up from 3.5 percent to 3.8 percent in August (and remained there in September), the highest since February 2022.
What's We're Tracking:
But we’re not out of the woods just yet. The following risks could thwart the Fed’s attempt at a soft landing:
- Persistently high shelter prices. The growth of U.S. asking rents – what residents pay to sign a new lease – has been moderating for over a year now, but there is a significant lag between changes in market rents and what is captured by CPI (what residents are currently paying). For this reason, the shelter component of inflation remains stubbornly high (even though we know it will come down). This could prompt the Fed to enact additional rate hikes.
- Rising energy costs. While core inflation – which excludes the more volatile elements of food and energy – has moderated for six consecutive months, headline inflation rose to 3.7 percent year over year in both August and September due to a surge in energy prices. A more prolonged period of rising energy prices could induce the Fed to tighten policy further.
- Long and variable lags. Monetary policy typically operates with long and variable lags, which means that we may not yet have fully felt the effects of Fed interest rate hikes already enacted, let alone any additional increases going forward.
Why This Matters
Rising interest rates have already caused both debt and equity capital to pull back from the apartment market. This higher cost of capital has made it more difficult to build new housing and caused apartment sales volume to decrease sharply.
- Multifamily starts (5+ units in structure), when looking at a three-month moving average, fell to a seasonally adjusted annual rate (SAAR) of 388,000 units in September, down 26 percent from the prior year.
- The NMHC Quarterly Survey of Apartment Market Conditions recorded declining apartment sales volume for six consecutive quarters as of October. According to data from Real Capital Analytics, apartment transaction volume decreased 62 percent in 3Q 2023 compared to the prior year.
These rate increases also pose a threat to the apartment industry from the demand side, as a rapid rise in interest rates raises the odds of slower economic growth and higher unemployment going forward.
A softening market is good news for apartment residents as rents are plateauing or even decreasing throughout the country. However, persistently high interest rates, combined with market uncertainty and other factors such as soaring insurance costs and local and state taxes, threaten to diminish housing supply over the long term. Such a scenario would worsen housing affordability and drive up housing costs.
While today’s positive GDP reading is good news for a Federal Reserve that is trying to bring down inflation without meaningfully impacting economic growth and jobs, there are still significant obstacles to achieving this sought-after soft landing.
About Chris Bruen
Chris Bruen is Senior Director of Research, with primary responsibility for aiding in and expanding upon NMHC’s research in housing and economics. Prior to joining the Council, Chris conducted research on the behavioral tendencies exhibited by option traders and served as a contributor to the Shanghai-based business publication, MorningWhistle.com, where he wrote on topics relating to Sino-American economic policy. Chris holds a bachelor’s degree in Finance from The George Washington University and an M.S. in Economics from Johns Hopkins University.
He can be reached at cbruen@nmhc.org.