Election Uncertainty Drives Higher Rates
NAHB Chief Economist Robert Dietz provided the following economic overview in his bi-weekly newsletter Eye on the Economy.
Despite expected Federal Reserve rate cuts for short-term interest rates, long-term rates have moved higher in recent weeks. In fact, since mid-September, the 10-year Treasury rate has increased a dramatic 70 basis points, rising this week to near 4.3% — the highest rate since July.
Long-term interest rates typically increase because of improved economic growth expectations, higher inflation expectations, future concerns over rising debt and policy issues. The recent rise appears to relate to bond market concerns of a rise in the federal deficit after the election, as both candidates have prioritized items like tax cuts over deficit reduction. While NAHB continues to forecast that long-term interest rates will move lower in the coming quarters, this process will be slow and uneven.
The rise in interest rates, particularly counter to forecaster expectations of additional declines, have taken a toll on certain housing measures. Existing home sales , as elevated home prices are causing potential buyers to hold out for lower rates. Inventory, however remains lean at just a 4.3-month supply. New home sales benefited from limited resale inventory, rising 4.1% in September to an annual rate of 738,000 — a 6.3% increase from a year ago. While new inventory has increased to a 7.6-month supply, combined new and existing single-family home inventory remains below historic norms at less than a five-month supply.
Given the financial and macro headwinds, builder sentiment remains below break-even levels but is improving. Builder confidence in the market for newly built single-family homes was 43 in October, rising two points from the September reading, according to the NAHB/Wells Fargo Housing Market Index (HMI). The HMI component measuring sales expectations in the next six months increased four points to 57, signaling market gains in the quarters ahead.
Consistent with the gain in the HMI, single-family starts increased 2.7% to a 1.03 million seasonally adjusted annual rate in September. On a year-to-date basis, single-family construction is up 10.1%. Multifamily production decreased 9.4% to an annualized rate of 327,000 — the weakest pace since May. Multifamily construction will remain weak as completions of apartments are elevated and markets await improved financial conditions. Markets will need to be patient as the election looms, increasing short-term uncertainty.