By: Damien Strohmier, Senior Manager, CPA, CCIFP

The housing market is at an all-time high and Zillow hounds would concur that the forecast over the next few years does not have it slowing down. But what about inflation, interest rates, and supply chain, how will they impact consumer confidence and the residential housing market?

If you were able to join us for Blue & Co.’s 2nd Annual Construction Summit, you had the opportunity to hear our keynote speaker, Dr. Anirban Basu, provide an economic overview of the industry. This article is a reflection from Dr. Basu’s presentation and other information reviewed to discuss the interplay of inflation, interest rates, and the supply chain and how they will potentially impact housing prices over the next few years.

Inflation and Interest Rates

How do inflation and interest rates relate to one another? Suppressed interest rates generally create more availability of lower-cost funds to borrowers. More borrowers with the ability to purchase housing increases competition in the market, which in turn drives up prices, and results in inflation. To slow inflation, the Federal Reserve would typically raise the borrowing rate of Federal funds and thus impact the rates at which banks would lend to homeowners.

What is happening now then? The Federal Funds Effective Rate is at .08%, up from its all-time low of .05% at the onset of the pandemic in April and May 2020, but still extraordinarily low and supportive to the housing market. These rates are similar to the post-2008 market crash where the average rate was.13% from 2009 to 2015. Just as there was a period of suppressed rates from 2009-2015, it is reasonable to expect another prolonged period of lower rates. If this is in fact the case, low-cost funds will continue to be available to borrowers and inflation will continue to rise for the foreseeable future.

Supply Chain

On top of inflation, the nation is experiencing a well-publicized supply chain crisis that is further driving up the prices of materials and other goods. The impact to housing is that the cost of building may no longer make sense to many that were in, or were about to enter, the market. Until material costs go down, these supply chain issues will likely slow new home builds, especially if borrowing rates begin to creep up. Does this really change the demand for housing though? Perhaps not.

Instead, it may shift buyers into different purchasing markets – for example, leaving the new home market and instead purchasing an existing home. However, the scarcity of available inventory coupled with elevated prices probably has precluded some families to remain in the multifamily rental market for longer than they would prefer. Once material costs stabilize, it is reasonable to expect that new housing will become more desirable and existing home values may dip.

How long until stability returns to the supply chain? During his Summit presentation, Dr. Basu mentioned the disruption could continue for some time before eventually regressing to a new normal. Ripples in the supply chain are expected before the new normal is reached. Once the supply chain appears to be fixed or caught up, the commercial projects and other spending that were delayed because of high material costs may ramp up. The prospect of a large infrastructure bill that will provide more resources to buyers to purchase goods may also impact this. Long story short, supply chain stability may take some time if borrowing rates remain low and the infrastructure bill is passed.

New Building and Existing Home Demand

One of the primary drivers to building demand is the availability of funds.  As discussed above, if monetary policy is similar to post-2008, we can expect lower interest rates for an extended period of time.

Population increases will also drive additional demand. The population in the United States has continuously seen growth over at least the last 50 years. While the growth rate has been positive, the rate of growth has decreased. But despite a slower rate of growth, residential housing demand remains high. As evidenced in Dr. Basu’s presentation, new building permits issued indicate that the rate of building is still less than the pre-2008 era. What can we conclude here? The biggest inference I make is this data suggests there is still significant room for new residential construction to meet demand.

Conclusion

Before we conclude, my caveat to this article is that it is one accountant’s opinion and my take of what could happen in the future related to the factors discussed above.

The short-term outlook for the residential home market appears positive. Positive to the extent prices continue to rise? No, more positive given there is not an underlying issue that dramatically changes the market in the near term. I still do expect minor volatility as the demand for new construction building and existing residential housing shifts back and forth as the supply chain issues resolve.

Long-term outlook, a correction of some nature is inevitable, but unlike the 2008 housing bubble, I believe the correction will be less dramatic.

While this article focused in on residential housing, Blue & Co.’s Construction Team plans to have an additional follow-up to Dr. Basu’s presentation at the Construction Summit on commercial project demand. Our team is happy to discuss these and other economic factors and how they may impact your business’s strategic goals.