In the recent revision of the US GDP report, a noteworthy shift in the housing market emerged—residential investment contributed positively to economic growth for the first time in over two years. Despite the Federal Reserve’s aggressive tightening, marked by the highest interest rates in decades, the housing sector experienced a substantial turnaround.
The residential investment contributed nearly a quarter of a percentage point to the overall 5.2% expansion in the last quarter, showcasing the resilience of the housing market. This is particularly surprising given that 30-year fixed-rate mortgages averaged over 7%, a level not seen in more than two decades.
Typically, construction is considered one of the more interest-rate-sensitive sectors, as developers often rely on borrowing to fund new properties. However, the construction job market has thrived amid the most aggressive Federal Reserve tightening since the 1980s, with over 8 million workers in construction jobs—more than ever before.
While there have been challenges in specific areas, such as commercial real estate (CRE), grappling with reduced office occupancy since the onset of the pandemic, the overall construction sector has defied expectations.
Adam Portnoy, CEO of RMR Group, overseeing approximately $42 billion of CRE assets, highlighted a 50% year-over-year decline in CRE transaction activity. Rate hikes have increased the cost of new credit, posing challenges for refinancing, especially for maturing CRE loans in the near future.
Despite high mortgage rates affecting existing home sales, reaching the lowest levels since 2010, new construction has remained robust. Residential builders have adopted creative strategies, offering teaser rates to mitigate the cost of mortgages for new buyers. This innovation has played a crucial role in sustaining new home sales.
Dario Perkins, managing director at TS Lombard, attributes the resilience of new home sales to creative financing options and the stability of the job market. With low unemployment and rising wages, people can better service their debt, preventing forced selling that often amplifies recessionary processes during downturns.
While a turnaround in the job market could alter the equation, the current scenario, coupled with diminishing inflation, provides an opportunity for monetary policymakers to navigate potential challenges successfully. The unexpected strength in the housing sector stands out amid broader economic uncertainties.