What's new:
The Federal Reserve announced today that it will hold interest rates steady at its current federal funds target between 5.25 and 5.50 percent, the highest in 22 years. Yet, FOMC officials are projecting rates to be cut by a median of 75 basis points in 2024.
In its statement, the Fed acknowledged that progress has been made on easing inflation without incurring significant increases in unemployment. Additionally, it cited strong yet moderating economic growth and flattening housing sector activity, largely due to high mortgage rates, as reasons for its decision. The Fed reiterated it is still fully committed to its 2% goal and is not yet declaring victory.
Cooling inflation:
Core inflation, which excludes the more volatile elements of food and energy, remained at 4.0% in November after seven consecutive months of cooling.
Moreover, we know that shelter inflation (40 percent of Core CPI), will continue to come down as a lagged response to slower growth in asking rents.
U.S. asking rents – what residents pay to sign a new lease – have 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).
- The growth of asking rents for multifamily properties peaked at 10.5% year over year in 1Q 2022, according to data from CoStar, and then moderated for six consecutive quarters, reaching just 0.8% annual growth in the third quarter of this year.
- Shelter inflation as measured by the CPI, on the other hand, didn’t peak until March of this year at 8.2% before cooling to 6.5% in November.
That said, headline inflation stands at 3.1% year-over-year, still higher than the Fed’s stated target of 2.0%.
Why this matters:
Rising interest rates have caused both debt and equity capital to pull back from the apartment market.
As of October, NMHC’s Quarterly Survey of Apartment Market Conditions recorded nine consecutive quarters of worsening conditions for debt financing and seven consecutive quarters in which equity financing became less available.
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 365,300 units in October, down 35.0% from the prior year.
- Apartment transaction volume decreased 60.0% in 3Q 2023 compared to the prior year, according to data from Real Capital Analytics.
At a time when the nation is facing severe housing affordability challenges, policymakers should exercise caution regarding policies that may compound and exacerbate already difficult market conditions. The nation needs to expand housing supply, equity and availability—not limit it.
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.