Housing Inventory Crisis Challenges Federal Reserve Efforts | Episode 148 | 06-20-24

Megan addresses the alarming drop in housing starts and building permits, which have reached their lowest levels since June 2020. Both single-family and multifamily homes are affected, signaling a broad-based decline in construction activity. Housing starts are a crucial indicator of construction activity, while building permits serve as a leading indicator for future construction. The decline in both metrics suggests that the housing market is struggling to recover, exacerbating the already critical inventory shortage.

This persistent lack of inventory is keeping housing prices high, making it difficult for the Federal Reserve to manage inflation effectively. Megan highlights that while the Fed can influence monetary policy, it has limited tools to directly address the housing shortage. The central bank cannot build new houses, and thus, housing inflation remains a "sticky" issue that complicates their efforts to control overall inflation rates.

In addition to the housing market woes, Megan also touches upon recent trends in the tech sector. After a significant surge, the tech market is experiencing some profit-taking, which is contributing to market volatility. This profit-taking is a natural part of market cycles, especially after a period of substantial gains. However, it adds another layer of complexity to the current economic landscape.

Rising bond yields are another critical topic of discussion in this episode. Bond yields have been on an upward trajectory, which could have significant implications for future Federal Reserve actions. Higher bond yields generally indicate higher borrowing costs, which can dampen economic activity. Megan suggests that the combination of high housing prices and rising bond yields presents a challenging environment for the Fed. The central bank must carefully balance its actions to avoid stifling economic growth while trying to manage inflation.

Well, we're back at some pandemic levels here for housing guys. This is Megan Horneman. You're listening to the regular segment of Markets with Megan and what we're seeing today is we got information on housing starts and building permits. Housing starts obviously that's construction activity. That brings inventory to a very depleted inventory of homes. Building permits are a leading indicator for construction activity. Both of these fell to the lowest level since June of homes. Building permits are a leading indicator for construction activity. Both of these fell to the lowest level since June of 2020, so when we were in the depths of the pandemic, both of these were also, for the month of May, expected to be slightly higher, and keep in mind that May is typically a good seasonal period for houses. The big declines on a month-over-month basis it was broad. It was both single-family and multifamily homes. Multifamily housing starts now are down 50% versus a year ago. So we still have an inventory issue in the housing market and it doesn't look to be getting much better. So what does that mean?

The Federal Reserve has talked a lot about housing inflation. This is sticky. There's nothing that they can do about that. They can't come out and build new houses. So this is something they'll pay attention to it is one month. We'll look at these as more trends as we get more data on the housing market, which we will get next week. The markets are off a bit today, but it's more from just some profit taking on technology. Technology's had such a massive run up, so we're seeing some profit taking there and we're seeing bond yields up a bit as well, because again you have less inventory, housing prices are going to stay elevated and that is a problem for inflation and for the Fed to be able to cut the way that most are anticipating. That's all we have today. We'll be back next week. We've got a lot more housing data to give you and we'll get that third reading on the first quarter GDP. Have a great weekend, thank you.