Eye on the Economy: The Fed Moves

***Eye on the Economy is a biweekly survey of NAHB’s economic and housing analysis from Chief Economist David Crowe.

After a long period of speculation, the Federal Reserve lifted its target for the short-term federal funds rate from 0-25 basis points to 25-50 basis points. The path of subsequent increases is expected to be gradual and will be dependent on the progress of economic conditions, namely continuing strength in output growth, improvements in the labor market and progress toward two percent inflation.

The Federal Reserve is acting now due to general economic improvements, including sustained economic growth and diminished labor market slack. NAHB expects that short-term rates will move up modestly, while longer-term rates, including fixed-rate mortgages, will increase even more gradually. Despite the rise in rates, we are forecasting accelerating growth for single-family construction in 2016 due employment and household formation growth.

Indeed, home builder confidence is strong. While the NAHB/Wells Fargo Housing Market Index fell one point to 61 in December, the index has been between 60 and 62 for six of the last seven months. The three components mirrored the trend with current sales falling one point to 66, future expectations down two points to 67 and traffic down two points to 46.

Home construction data improved for November. Single-family starts were up 7.6% to 768,000, the highest pace since January 2008. Every region except the Midwest experienced a rise in single-family starts. Permits also peaked at their highest level since August 2007 at 1,289,000, which was up 11% from an upwardly revised October. Single-family permits were up modestly but enough to also set an eight year record of 723,000.

Multifamily starts rose 16.4%, offsetting a 25% drop in October to a 405,000 level and near the average so far this year of 396,000. Multifamily permits jumped to 566,000, a 26.9% rise, and well above the year-to-date average of 481,000.

 



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