One thing moving markets 

… is the slowing supply of new apartment units, with the annual rate of multifamily building starts dropping to 322,000 units in April 2024 – the second-lowest level in four years.¹ 

Housing construction relies heavily on debt financing, particularly for large multifamily developments. Because of this, the sector is especially sensitive to heightened interest rates. Look no further than to the example of pandemic boomtowns. 

Slowdown on boomtowns 

During the peak of the pandemic, remote work opportunities triggered a wave of migration away from major city centers to "pandemic boomtowns," where cities like Austin, Boise, Denver, Hartford, Las Vegas, Nashville, Providence, Raleigh, Salt Lake City, and Tampa experienced rapid population growth as people sought lower living costs and more space.² 

Though the influx initially skyrocketed housing prices, the market for boomtowns began to shift in spring of 2022, when the Federal Reserve began raising interest rates to multi-decade highs to combat inflation. Higher borrowing costs have since cooled these once-hot markets, leading to increased inventory, longer listing times, and steadily moderating prices. 

For example, in Austin, the median price per square foot is down 9%. Meanwhile, the median sale price, which was once a 9% premium to the initial listing price, is now 3.5% below it. Elsewhere, the days a listing remains on the market in Tampa have grown from 29 to 51. And the median sale price in Denver has fallen from 8% above the initial list price to 2.5% under.² 

Higher rates and lower lending 

Since 2019, the average time from construction authorization to project commencement increased by 45% to nearly 500 days.³ Because of financing challenges in today’s high-rate and stricter lending environment, developers have delayed or even paused incomplete projects due to a lack of affordable capital.  

On top of this, developers are battling lending constraints as regional banks grapple with souring commercial real estate loans. Many large loans made before interest rates rose are now being marked down as major losses, leaving these banks more hesitant to hand out new loans to big borrowers, including developers. 

Delays in construction projects and reduced building starts can lead to job losses, and may also further encourage cautious lenders wary of credit risk. For residents, these delays also mean reduced supply, potentially driving prices higher.  

Shelter costs comprise a third of the Consumer Price Index (CPI) and 42% of core CPI.⁴ So upward pressure on prices in the housing market could have a substantial impact on inflation over time.  

 However, if higher rates continue to flatten rent growth, as in pandemic boomtowns, it could drive inflation lower in the near-term — potentially paving the way for the Federal Reserve to cut rates and gradually remedy constraints in the housing market. 

And a few top headlines 

The U.S. added 272,000 jobs in May, roughly 80,000 more than expected, while the unemployment rate increased from 3.9% to 4%.⁵ 

• After the previous month’s jobs numbers came in well below expectations, May’s figures paint a mixed picture of the labor market, which could complicate the Fed’s rate policy. 

The Small Business Administration (SBA) announced plans for new government-backed credit lines of up to $5 million for small businesses.⁶ 

• The new credit lines will include an annual fee and provide loans with interest rates around 12% to 15% given the current prime rate, providing small businesses with more working capital to fund and expand their operations. 

In the first quarter of 2024, American investors earned about $3.7 trillion from interest and dividends, according to the Commerce Department.⁷ 

• Although borrowing rates are elevated, the surge in investment income could be supporting consumer spending. 

U.S. credit card spending shows shoppers are selectively buying non-essential items, boosting sales for trendy brands while cutting spending elsewhere.⁸ 

• Clothing companies have been major benefactors of this selective spending. Bigger-ticket purchases on electronics and home products, however, have fallen by the wayside.  

The combination of higher home prices and low-interest mortgages financed during the pandemic has created over $17 trillion in home equity for U.S. mortgage holders, averaging about $305,000 per borrower.⁹ 

• Although borrowing rates are elevated, homeowners can generally borrow up to 85% of their home equity through options like HELOCs, cash-out refinancing, or reverse mortgages. 
   

What to be on the lookout for next week 

Retail sales data for May will be released on Tuesday, June 18. 

The strength of the consumer over the years has been the principal driver of the better-than-expected U.S. economy. But recent indicators point to softness in spending: Estimates of first-quarter GDP lowered from 1.6% to 1.3%, citing diminished consumer spending as the main reason for the downward revision.¹⁰ Meanwhile, the previous retail sales report showed spending was unchanged from the month before. This next print could buck or solidify this trend. 

In the wake of post-pandemic inflation, the economy’s continued strength is the main reason the Fed has held rates at a multidecade high for seven straight meetings.  

With that in mind, a cooler-than-expected retail sales report could help pave the way for interest rate cuts before the end of the year and potentially lend a boost to equities as a result. On the other hand, a strong report could add to the already muddied waters, leaving the future of inflation and interest rates hanging in the balance.