Higher Rates Substantially Hurting Housing Affordability

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As we anticipate today's US housing starts data, it's worthwhile to address the housing sector. Housing and construction are significant to the US economy, especially employment. The BLS indicates that around 11 million individuals are employed directly in construction. Moreover, an additional 1.85 million are engaged in real estate tasks such as bookkeeping, operations, and groundskeeping. This doesn't even account for those within construction supply chains. Using the language of "multipliers," the multiplier of the construction industry is among the highest of any industry.

In the previous month, housing starts experienced an 11.3% M/M decline, adjusted for seasonality. It'll be intriguing to see September's data. Notably, increased rates haven't bolstered the supply side. Persistent inflation in shelter is evident at 7.2%, with rental inflation at 7.4%. The median mortgage payment, excluding fees and taxes, has surpassed $2,800 monthly. This surge in rental inflation continues even as rental vacancies have increased in recent quarters, with many opting to live with family or friends to curb expenses due to the lagging nature of US CPI rental construction. More timely measures, like Zillow's Observed Rent Index, have now fallen below 2%. Since 1985, post-inflation adjustment, the median household income has risen just under 40%, while median rent has climbed by a mind-bending 160%.

A common narrative we encounter is the perception that higher rates aren't impacting the economy. In reality, they substantially do and fail to address the supply side of inflation, notably in housing affordability.

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