Housing Market Cools as Interest Rate Increases Impact Economy

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Housing Starts and Building Permits Decline as Mortgage Rates Rise

Housing Starts and Building Permits Decline as Mortgage Rates Rise

The Covid-19 pandemic profoundly altered the U.S. housing market. Homeowners and renters reevaluated their housing needs and want as they spent more time at home. At the same time, remote work set off a great migration as employees decided where they wanted to live based on lifestyle rather than employer location. The two themes created a perfect storm of housing demand and overwhelmed homebuilders.

This chart shows the annualized pace of housing starts and building permits steadily climbed after initially plunging during the depths of COVID-19. Housing starts and building permits jumped to their 2006 highs, levels set during the last housing cycle boom in the 2008 financial crisis. Home and building material prices skyrocketed as housing demand outpaced supply.

Recent data points indicate the housing market is cooling. Figure 1 shows the pace of housing starts and building permits declined during the first half of 2022, and data recently released by Redfin appears to confirm the slowdown. The real estate brokerage reported that ~60,000 home purchase agreements fell through during June, equal to 14.9% of homes that went under contract. Based on Redfin’s analysis, it was the highest percentage on record except for March and April 2020.

The ongoing housing market slowdown indicates the Federal Reserve’s interest rate increases are already impacting the economy. Keep in mind that this is part of the Fed’s plan – to ease inflation pressures by reducing demand for goods and services. However, the Fed’s actions are blunt and could start to impact more segments of the economy, such as manufacturing and retail sales. Investors are concerned the Fed is too focused on inflation and will raise interest rates too fast and too high, slamming the brakes on the U.S. economy and starting a recession. If you have read about rising recession fears, this is one of the catalysts behind the concern.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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