By Rob Deitz, PhD., Chief Economist, National Association of Home Builders
The economy has slowed, as evidenced by a 1.9% estimated GDP growth rate in the third quarter of 2019. Yet, housing continues to rebound thanks largely to lower mortgage interest rates, resulting in gains for single-family permits and starts since last spring. The home building component of GDP, residential fixed investment, made a positive contribution to the headline third quarter GDP number after six prior quarters of declines. Home building contributed 0.18 basis points to the headline 1.9% growth rate.
However, the slowing economy and anchored inflation data led the Federal Reserve to lower its federal funds target to a top interest rate of 1.75%. This marks the third cut of 25 basis points in 2019, after four rate hikes in 2018. In retrospect, the 2018 tightening of monetary policy was a policy mistake given tame inflation data and rising macroeconomic headwinds. That said, the revised, current dovish stance of the Fed — particularly its effect of lowering mortgage interest rates — has been a positive factor for housing since the spring.
The rebound for housing in 2019 is clear in recent home building data. The NAHB/Wells Fargo Housing Market Index (HMI) increased to a level of 71 in October, a 20-month high. Single-family starts increased to a 918,000 annual pace in September, marking four months of gains. While new home sales were relatively flat in September, sales are running 7.2% higher in 2019 on a year-to-date basis compared to 2018 transaction volume. And new inventory is down to a 5.5-month supply, suggesting additional construction gains ahead.