Fed Hints at Tapering as Early as November; Housing Market Remains Generally Robust Despite Supply and Labor Constraints

Key Takeaways:

New home sales will be reported in next week’s update.

• The Federal Open Market Committee (FOMC) kept the target rate for the federal funds rate unchanged at 0.0 to 0.25 percent at its September 21-22 meeting, while also keeping the pace of asset purchases unchanged at $120 billion per month. The median GDP growth projection for 2021 was downgraded from 7.0 to 5.9 percent, while the median 2021 PCE inflation projection was increased from 3.4 to 4.2 percent. In the press release, the FOMC again stated that the economy has made progress toward its goals of maximum employment and price stability, and that further progress would suggest that “a moderation in the pace of asset purchases may soon be warranted.” In his press conference, Fed Chairman Jerome Powell noted that the FOMC intends to put out notice that the asset tapering could begin as soon as the FOMC’s next meeting on November 2-3, and that most officials agreed that a gradual taper “that concludes around the middle of next year is likely to be appropriate.” The dot plot showed that 9 of 18 FOMC officials expected interest rates to increase in 2022, up from 7 officials in June.
• Housing starts increased 3.9 percent to a seasonally adjusted annualized rate (SAAR) of 1.6 million units in August, according to the Census Bureau. Single-family starts declined 2.8 percent to a SAAR of 1.1 million units, while multifamily starts jumped 20.6 percent to a SAAR 539,000, the fastest pace since January 2020. Single family permits ticked up 0.6 percent to a SAAR of 1.1 million, the first monthly increase since March, as multifamily permits increased 15.8 percent to a SAAR of 674,000, the fastest rate since 1990.
• Existing home sales fell 2.0 percent to a SAAR of 5.9 million units in August and were 1.5 percent lower than a year ago, the first year-over-year decline since June 2020, according to the National Association of REALTORS®. On an annual basis, the number of existing homes on the market fell 13.4 percent, the 27th consecutive month of year-over-year declines. The months’ supply was flat at 2.6. The median sales price for an existing single-family home was up 15.6 percent from a year ago, the slowest annual growth rate since February.
• The National Association of Home Builders/Wells Fargo Housing Market Index increased 1 point to 76 in August after falling for three consecutive months. A reading above 50 indicates that more builders view the single-family market as “good” rather than “poor.” Traffic of prospective buyers increased 2 points to 61, the first increase since April 2021. The index for current single-family sales increased 1 point to 82, while the index for single-family sales in the next six months was unchanged at 81. The press release cited “lower lumber prices and strong housing demand” as the source of the small increase in confidence but noted “the housing sector continues to grapple with building material supply chain issues and labor challenges.”

Forecast Impact:

The rebound of housing starts in August following a 6.2 percent decline in July was driven entirely by a jump in the notoriously volatile multifamily starts number. Single-family starts declined but remained elevated above their 2019 pre-COVID trend, as a near record-low number of existing homes for sale and low interest rates continue to drive strong demand for new homes. This robust demand was also reflected in the NAHB press release, though the primary constraint on even more construction remains elevated material costs due to supply chain bottlenecks, as well as construction labor shortages. This dynamic is supported by the number of single-family houses under construction rising to 702,000, the most since mid-2007, despite the decline in single-family starts. This deviation suggests that construction is taking longer than usual to complete given the constraints noted earlier, but as these constraints ease, we expect the starts pace to pick up after builders are able to make progress through the current backlog of orders. As these supply chain and labor shortages gradually ease, we continue to expect housing starts to remain robust through the end of the year and into 2022 as builders scramble to meet pent-up demand and catch up with years of underbuilding. Similarly, the drop in existing home sales was near our expectation, and we continue to believe the decline reflects the severe shortage in the number of homes for sale rather than a significant decline in demand. We expect the lack of homes available for sale to continue to weigh on the pace of sales through the end of the year.

The FOMC looks ready to begin asset tapering as soon as November, assuming economic conditions continue to improve. Though somewhat earlier than we had initially anticipated, the taper is unlikely to substantially impact our growth or inflation forecasts. In our view, the slightly more constrained credit conditions could have a small negative impact on consumption and housing demand if mortgage rates increase, but it also decreases the possibility of run-away inflation that could necessitate a more abrupt and aggressive policy response.

Nathaniel Drake
Economic and Strategic Research Group
September 23, 2021

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