If You Build It, They Will Come

Key Points:

·     It may be fair to say that US interest rates have moved faster and further than people have expected. Despite the recent pause and market reaction, the US Federal Reserve is still hawkish overall, with the possibility for further rate rises on the horizon.

·        The US housing market is on the front line of the economic reaction to the Fed’s tightening policies, and through 2022 we saw an unwinding of the post-COVID boom in housing permits and house price rises.

·        For example, housing permits hit their highest levels in Dec 2021 and then fell -28% over the next 12 months.  While house prices peaked in June 2022 and then proceeded to fall -4.5% over the next eight months.

·        Yet, despite several rate rises since then, these two measures have begun to recover. House prices have rallied +4% since Feb 2023, while the latest data on building permits for houses (a forward looking and less weather dependent measure than housing ‘starts’) shows they have started to climb again. Building permits bottomed in January 2023 and have started to recover.

·        Both house prices and building permits may be a telling sign that the worst is over for the US housing sector, which reinforces the notion of a robust and resilient US economy.