What Lower Interest Rates Mean for Housing

The National Association of Home Builders analyzed what is necessary for the housing industry to take advantage of the recent drop in interest rates.

Lower interest rates present an opportunity for the housing market, which has failed so far to respond energetically to this positive development due to prior affordability headwinds. 

However, despite the approximate 100 basis point decline in the US 10-year, which should reduce the average 30-year fixed rate mortgage to around 3.5%, housing activity has not responded as robustly as history would suggest. In part, this lack of response is due to the surprise associated with this decline, so markets will need time to adjust. For example, these rates are below NAHB’s forecast from the start of 2019. The lack of a home sales response is also due to the fact that rates are lower for the wrong reasons. These declines, while a positive for the cost of buying a home, are occurring due to the uncertainty produced by trade and growth concerns.

More fundamentally, lower rates by themselves are not sufficient to generate a significant increase in home construction today because housing affordability is a function of rates, prices/costs, and incomes. And due to the significant supply-side headwinds of the last few years (worker shortages, materials and regulatory burdens, chief among what I’ve called the “5 Ls” – labor, lots, laws, lending and lumber), construction costs have outpaced income growth, leaving housing affordability at the start of 2019 near a 10-year low.

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