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Top Posts – Lower Mortgage Rates, Better Affordability – Eye On Housing

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As housing affordability remains a critical challenge across the country, mortgage rates continue to play a central role in shaping homebuying power. Mortgage rates stayed elevated throughout 2023 and early 2024. Recent data, however, shows a modest decline in mortgage rates. Even slight declines can have a significant impact on housing affordability, pricing more households back into the market. New NAHB Priced-Out Estimates show how home price increases affect housing affordability in 2025. This post presents details regarding how interest rates affect the number of households that can afford a median priced new home.

At the beginning of 2025, with the average 30-year fixed mortgage rate at 7%, around 31.5 million households could afford a median-priced home at $459,826. This requires a household income of $147,433 by the front-end underwriting standards[1]. In contrast, if the average mortgage rates had remained at the recent peak of 7.62% in October 2023, only 28.7 million households would have qualified. This 62-basis point decline has effectively priced 2.8 million additional households into the market, expanding homeownership opportunities.

The table below shows how affordability changes with each 25 basis-point increase in interest rates, from 3.75% to 8.25% for a median-priced home at $459,826. The minimum required income with a 3.75% mortgage rate is $110,270. In contrast, a mortgage rate of 8.25%, increases the required income to $163,068, pushing millions of households out of the market.

As rates climb higher, the priced-out effect diminishes. When interest rates increase from 6.5% to 6.75%, around 1.13 million households are priced out of the market, unable to meet the higher income threshold required to afford the increased monthly payments. However, an increase from 7.75% to 8% would squeeze about 850,000 households out of the market.

This exemplifies that when interest rates are relatively low, a 25 basis-point increase has a much larger impact. It is because it affects a broader portion of households in the middle of the income distribution. For example, if the mortgage interest rate decreases from 5.25% to 5%, around 1.5 million more households will qualify the mortgage for the new homes at the median price of $459,826. This indicates lower interest rates can unlock homeownership opportunities for a substantial number of households.

[1] . The sum of monthly payment, including the principal amount, loan interest, property tax, homeowners’ property and private mortgage insurance premiums (PITI), is no more than 28 percent of monthly gross household income.



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Top Posts – The Power of Women in the Workforce – Eye On Housing

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Over the past 125 years, women have played a crucial and multifaceted role in the labor force. Increasing women’s participation in the workforce is not only essential for individual and family well-being, but also contributes significantly to overall labor force participation rates and economic growth by adding more workers and enhancing overall productivity1.   

Historically, women’s labor force participation rate rose rapidly between 1948 and 2000, peaking around 60% in 1999. During the same period, men’s participation rates declined. However, since 2000, the growth in women’s labor force participation has flattened and then declined.

According to the March 2025 Employment Situation Summary reported by the Bureau of Labor Statistics (BLS), women’s labor force participation rate held steady at 57.5%, and women now represent nearly half (47%) of the total U.S. labor force.

Selected Categories

Prime-age women (ages 25-54) represent a significant and growing segment of the U.S. labor force. As of 2024, they accounted for nearly 30% of the civilian labor force, compared to 34% for prime-age men. According to the latest data from the Current Population Survey (CPS), prime-age women had a labor force participation rate of 78%, the highest among all female age groups. This rate has fully recovered from the COVID-19 pandemic, surpassing its previous peak recorded in February 2020.

As discussed in the previous blog, higher levels of educational attainment are strongly associated with higher labor force participation and lower unemployment. Women with a bachelor’s degree or higher have played a vital role in shaping the labor market. In 2024, about 70% of women with this level of educational attainment were active in the labor force, compared to only 34% of women who had not completed high school.

The CPS data also reveals notable differences in women’s labor force participation based on parental status.  Women with older children (ages 6 to 17) and no children under 6 years old had a higher labor force participation rate than those with younger children. Interestingly, women without children had a relatively lower labor force participation rate compared to those with children. Further research from the Brookings Institution and The Hamilton Project2 highlights a significant shift: women with young children (under 5 years), especially those who are highly educated, married, or foreign-born, are more likely to be in the labor force now than they were before the pandemic.

Women’s labor force participation also varies by race and ethnicity. Among women ages 16 and over, Black women had the highest participation rate at 61%, followed by Hispanic women (59%), Asian women (59%), and White women (57%).

The figure below reflects the diversity and complexity of women’s roles in the workforce.

Women in Industry

As more women enter the labor force, they are increasingly shaping a broad range of industries–from healthcare and education to leisure and hospitality, retail, technology, and construction.

In 1964, women were primarily employed in a narrower set of sectors. The top four industries employing the most women at that time were: manufacturing; trade, transportation, and utilities; local government; and education and health services3.

By 2024, however, women’s participation in the workforce has expanded significantly, both in scope and impact. According to the latest CPS data, women dominated the education and health services sector, where they hold approximately 27.6 million jobs. That means seven in every ten workers in this field are women. Moreover, women now make up more than half of the workforce in several other key industries, including other services, leisure and hospitality, and financial activities.

Despite their growing role in the workforce, they remain underrepresented in certain sectors, most notably, construction. Although women now make up a significant portion of the overall labor force, they account for just 11% of total employment in the construction industry. Of those, only 2.8% of women work in actual trade roles, while most women in the industry are employed in:

Office and administrative support

Management

Business

Financial operations

Gender Pay Gap by Occupation

While the gender pay gap in the U.S. has narrowed significantly over the past few decades, it remains a persistent issue in the labor market. According to a study4 by the Pew Research Center, women earned about 65 cents for every dollar earned by men in 1982. By 2023, that figure had risen to approximately 82 cents on the dollar—a clear sign of progress. However, the pace of change has slowed considerably in recent years.

In 2024, the CPS data shows that women working full time earned a median weekly wage of $1,043, compared to $1,261 for men. This means women earned 83 cents for every dollar earned by men—a 17% gender wage gap.

At the occupational level, women earn less than men across all major occupational groups, even ones dominated by women. The smallest gender pay gap was found in community and social services occupations. In contrast, occupations in legal, sales and related, protective services, and production display larger disparities in earnings between women and men.

The Future of Women in the Workforce

Looking ahead to 2033, the number of women in the labor force is expected to continue growing, driven primarily by the prime-age women (ages 25 to 54). BLS employment projections estimate that roughly 3.2 million prime-age women will join the workforce between 2023 and 2033. During this period, their participation rate is projected to increase slightly, reflecting continued momentum in women’s economic engagement.

Meanwhile, the U.S. labor market is experiencing a critical shortage of skilled workers, especially in fields like STEM (science, technology, engineering, and math) and skilled trades. As the NAHB Chief Economist stated, “The ultimate solution for the persistent, national labor shortage will be found…by recruiting, training and retaining skilled workers.” This applies equally to the women’s labor force.

Women’s participation is closely tied to their access to education and skills development. As more women pursue higher education and specialized training, their career opportunities expand, particularly in fields previously dominated by men. This progress can help narrow the gender pay gap over time.

However, women often shoulder disproportionate family and caregiving responsibilities, not only during their reproductive years, but throughout their lives. According to the American Time Use Survey (ATUS), on a typical weekday, prime-age working women spent about four hours on caregiving and household tasks, such as household activities, caring for and helping household members, and purchasing goods and services. This is nearly twice the time men spent on the same activities. Many women face a tough decision between career advancement and family caregiving responsibilities, often leading to reduced work hours or even complete withdrawal from the labor force.

To support and increase women’s labor force participation, it may be beneficial to consider a range of policies and workplace reforms. For example, promoting flexible work arrangements can help women better balance professional and personal responsibilities. Narrowing the gender pay gap would also play a critical role in ensuring fair compensation and financial security. Furthermore, expanding access to affordable and high-quality childcare could remove a major barrier for many working mothers. In addition, continued investment in education and training programs would enable women to advance in their careers and contribute to broader, long-term economic growth.

To conclude, empowering women to succeed in the workforce not only improves individual and family well-being, but also strengthens the entire economy.

Note:



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Top Posts – U.S. Population Grows at Highest Rate Since 2001 – Eye On Housing

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According to the U.S. Census Bureau’s latest estimates, the U.S. resident population grew by 3,304,757 to a total population of 340,110,988. The population grew at a rate of 0.98%, the highest rate since 0.99% in 2001. This also marked the third straight increase in the growth rate of the U.S. population. The vintage population estimates are released annually and represent the change in the U.S. population between July 1st of 2023 and 2024.

The Census Bureau reports that the primary source of population growth was net international migration (immigration), as international migration levels once again were higher than the previous year. The level of net international migration between 2023 and 2024 was 2,786,119. The second component of population growth is natural growth, which represents births minus deaths. Births totaled 3,605,563, down slightly from last year, while the number of deaths was reported at 3,086,925, also a decrease from last year. The natural growth, therefore, between 2023 and 2024 was 518,638.

Each region in the U.S. experienced population growth for the 2023-2024 period. The South led in population growth at 1.34% followed by the West at 0.85%. Meanwhile, the Midwest population grew 0.75%, while the Northeast grew the least at 0.59%.  

At the State level, 47 States and the District of Columbia had a population increase over the year. Of note, D.C. had the highest growth rate at 2.13%. Florida was second with population growth at 2.00% followed by Texas at 1.80%. Numerically, Texas experienced the largest population increase gaining 562,941. This was followed by Florida at 467,347 and California at 232,570.

Only three states lost population or remained level according to Census estimates. Vermont and West Virginia tied with a decline of 0.03%. Meanwhile Mississippi saw no population change.

California remained the most populous state by a healthy margin. California’s population was at 39,198,693, while the next most populous state was Texas at 31,290,831. To round out the top five States by total population the proceeding highest were Florida (23,372,215), New York (19,867,248), and Pennsylvania (13,078,751).



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Top Posts – Residential Remodelers Outnumber Single-family Builders in the U.S. – Eye On

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The number of residential remodelers in the U.S. has reached a record high of 128,187 establishments, 65% higher than the number of residential builders (single-family and multifamily), which stands at 77,455.  These official government counts were released by the U.S. Census Bureau as part of its 2022 Economic Census, which tallies American businesses every five years (in years ending in 2 and 7).

Growth in the number of remodelers significantly outpaced that of builders between 2017 and 2022. In that 5-year span, the remodeler count increased by 25% (102,818 to 128,187), while the number of builders grew at half that pace–by 12% (68,996 to 77,455).

A starker dichotomy emerges when comparing 2022 counts to those in 2007, prior to the financial crisis and the ensuing housing recession.  In that 15-year period, the official number of residential remodelers in the U.S. grew by 73% (73,888 to 128,187), while the official number of residential builders contracted by 21% (98,067 to 77,455).

Another way to analyze this data is by creating a combined universe of both builders and remodelers and then calculating each group’s share of the total. In 2022, for example, remodelers represented 62% of the total number of builders and remodelers in the U.S, while builders made up a minority share of 38%.  Remodelers have accounted for at least 60% of this total in the last three Economic Census (2012, 2017, and 2022). 

The last time builders comprised a majority share was in 2007, when they represented 57% of the combined total number of builders and remodelers in the country.



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Top Posts – States with Highest and Fastest Rising Construction Wages, 2025 – Eye On Housing

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Wage growth in construction continued to decelerate in April on a national basis, but the differences across regional markets remain stark. Nationally, average hourly earnings (AHE) in construction increased 3.6% year-over-year and crossed the $39.3 mark when averaged across all payroll employees (non-seasonally adjusted, NSA). Meanwhile, average earnings in construction in Alaska and Massachusetts exceeded $50 per hour (NSA). Across states, the annual growth rate in AHE ranged from 10.6% in Nevada to a decline of 3% in Oklahoma. This is according to the latest Current Employment Statistics (CES) report from the Bureau of Labor Statistics (BLS).   

Average hourly earnings (AHE) in construction vary greatly across 43 states that report these data. Alaska, states along the Pacific coast, Illinois, Minnesota, and the majority of states in Northeast record the highest AHE. As of April 2025, fourteen states report average earnings (NSA) exceeding $40 per hour.

At the other end of the spectrum, nine states report NSA average hourly earnings in construction under $34. The states with the lowest AHE are mostly in the South, with Arkansas reporting the lowest rate of $29.3 per hour.

While differences in regional hourly rates reflect variation in the cost of living across states among other things, the faster growing wages are more likely to indicate specific labor markets that are particularly tight. Year-over-year, Nevada, Mississippi, Alaska, Colorado, Texas, Florida, South Carolina, and Montana reported fastest growing hourly wages in construction, more than doubling the national average growth of 3.6%. Nevada reported the largest annual increase of 10.6%, while the growth rate in Mississippi and Alaska was just under 10%.

In sharp contrast, Oklahoma registered a decline in hourly wages of 3%. Five other states reported modestly declining hourly rates in construction, compared to a year ago – Louisiana, Missouri, Rhode Island, California, and Wisconsin.



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Top Posts – Cost of Constructing a Home in 2024 – Eye On Housing

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Construction costs account for 64.4% of the average price of a home, according to NAHB’s most recent Cost of Construction Survey.  In 2022, the share was 3.6 points lower, at 60.8%.  The latest finding marks a record high for construction costs since the inception of the series in 1998 and the fifth instance where construction costs represented over 60% of the total sales price.

The finished lot was the second largest cost at 13.7% of the sales price, down more than four percentage points from 17.8% in 2022.  The share of finished lot to the total sales price has fallen consecutively in the last three surveys, reaching a series low in 2024.

The average builder profit margin was 11.0% in 2024, up less than a percentage point from 10.1% in 2022.  

At 5.7% in 2024, overhead and general expenses rose when compared to 2022 (5.1%).  The remainder of the average home sale price consisted of sales commission (2.8%), financing costs (1.5%), and marketing costs (0.8%).  Marketing costs were essentially unchanged while sales commission and financing costs decreased compared to their 2022 breakdowns.

Construction costs were broken down into eight major stages of construction. Interior finishes, at 24.1%, accounted for the largest share of construction costs, followed by major system rough-ins (19.2%), framing (16.6%), exterior finishes (13.4%), foundations (10.5%), site work (7.6%), final steps (6.5%), and other costs (2.1%).

Explore the interactive dashboard below to view the costs and percentage of construction costs for the eight stages and their 36 components.

Table 1 shows the same results as the dashboard above in table format.  Please click here to be redirected to the full report (which includes historical results back to 1998).



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Top Posts – Who’s Still Working from Home in 2025? A Look at America’s Telework Trends – Eye

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Remote work may no longer dominate the U.S. labor force as it did during the height of the pandemic in 2020, but it still represents a substantial share of employment today. According to the latest data from the Current Population Survey (CPS), approximately 34.3 million employed people teleworked or worked at home for pay in April 2025. The telework rate, which represents the number of people who teleworked as a percentage of people who were working, was 21.6% in April, and it has consistently ranged between 17.9% and 23.8% between October 2022 and April 2025.

Of those who teleworked in April, more than half teleworked for all their working hours, while the remaining teleworked for some, but not all, of their work hours.

The distribution of telework across the U.S. workforce continues to reflect deeper patterns shaped by gender, age, education, occupation, and industry. The following insights are based on an analysis of monthly CPS data.

Gender: Women Lead in Telework

Women continue to outpace men in remote work participation.

Nearly 25% of employed women worked from home in April 2025.

In contrast, about 19% of employed men teleworked.

This gender gap reflects employment trends. Many women are employed in professional, administrative, or office-based roles. These fields transitioned smoothly to remote work during the pandemic and have largely maintained hybrid or fully remote options. Additionally, the growing rate of college completion among women1 has pushed more women into positions that are structurally suited to telework. Flexibility remains a priority, especially for women balancing work and caregiving responsibilities, further reinforcing the demand for work-from-home arrangements.

Age: Older Workers Are More Likely to Telework

Age also plays a major role in who works remotely. Workers aged 25 and older are more likely to telework than their younger counterparts.

Ages 16–24: Only 6.2% worked from home.

Ages 25–54: About 24% reported teleworking.

Ages 55+: Around 23% worked remotely.

Younger workers tend to fill entry-level roles in retail, hospitality, and service sectors that require in-person attendance. Meanwhile, older workers are more likely to have progressed in their careers into managerial or specialized roles where remote work is feasible or even expected.

Education: Higher Degrees, Higher Telework Rates

Education remains one of the strongest indicators of telework status. Higher educational attainment is positively associated with a higher telework rate.

No high school diploma: Just 3.1% worked remotely.

High school graduates, no college: 8.4% teleworked.

Some college or associate degree: 17.3% reported working from home.

Bachelor’s degree or higher: 38.3% worked remotely.

Higher educational attainment often leads to employment in knowledge-based sectors such as finance, information technology, consulting, and research. These roles often depend on digital communication tools and independent project-based tasks, making them well-suited for remote settings.

Occupation: Business and Financial Operations, and Professionals Dominate Remote Work

Not surprisingly, occupation heavily influences access to teleworking. Jobs that require physical presence, such as those in food service, transportation, manufacturing, and construction, naturally offer limited remote opportunities. In contrast, people employed in professional and technical fields report the highest telework rate, especially those working in computer and mathematical roles.

Industry trends mirror these occupational divisions. Certain sectors have fully embraced telework, particularly finance, information services, and professional and business services. These industries often prioritize flexibility and are structured in ways that make remote work not only possible but efficient. On the other hand, industries like construction, leisure and hospitality remain firmly grounded in physical spaces and in-person involvement. In these fields, work is inherently tied to locations and equipment that cannot be replicated remotely. The construction industry had a telework rate of just 9.8% in April, and leisure and hospitality reported an even lower rate of 8.1%.

Looking Ahead:

Remote work is not disappearing; it is evolving. The opportunity to work from home is increasingly concentrated among individuals with higher education levels, white-collar job titles, and positions in tech-driven or office-based industries. Meanwhile, those who are younger, have less educational attainments, or work in manual or service-based roles remain largely tied to traditional, in-person work.

For the future, we don’t know if telework will expand to become more inclusive or continue reinforcing existing divides in education and job roles. For now, the data suggests that remote work is here to stay, but only for some.

Note:

“U.S. women are outpacing men in college completion, including in every major racial and ethnic group”, Pew Research Center.

Connor Borkowski and Rifat Kaynas, “Telework trends,” Beyond the Numbers: Employment & Unemployment, vol. 14, no. 2 (U.S. Bureau of Labor Statistics, March 2025),



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Top Posts – Most Home Builders are Small Businesses – Eye On Housing

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Despite historically low self-employment rates and the rising market share of top ten builders, residential construction remains an industry dominated by independent entrepreneurs, with nearly 80% of home builders and specialty trade contractor firms being self-employed independent contractors. Even among firms with paid employees, the industry continues to be dominated by small businesses, with 63% of homebuilders and two out of three specialty trade contractors generating less than one million dollars in total business receipts. The new estimates are based on the 2022 Economic Census and Nonemployer Statistics data.

The Economic Census covers several construction subsectors within the home building industry:

 Residential Building Construction (RBC)

Single-family general contractors (excluding for-sale builders)

Multifamily general contractors (excluding for-sale builders)

For-sale new housing builders

Residential remodelers

Land Subdivision (or land developers)

Specialty Trade Contractors (STC)

The 2022 statistics show that the majority of residential construction businesses are self-employed independent contractors.  There are over 813,000 nonemployer firms in residential building construction (RBC), accounting for close to 80% of all establishments. In land subdivision, more than 9,000 independent contractors account for 68% of land subdivision firms.  Over 1.9 million specialty trade independent contractors make up 79% of all STC establishments. These nonemployer firms also account for almost half of the full-time employees (FTE) in residential building construction, 26% in land subdivision, and 28% in STC. 

Most of these self-employed mom-and-pop firms are very small, with annual receipts averaging under $103,000 for residential building construction, and under $70,000 for specialty trade contractors. Self-employed independent contractors in land subdivision average around $288,000 in annual business receipts. As a result, these nonemployer firms make up only 12% of all sales and receipts generated by residential building construction and land subdivision, and 9% of specialty trade contractors’ revenue.

Among residential construction businesses with paid employees, remodeling, land subdivision, and specialty trade subcontractors (STC) companies tend to be smaller.  Three out of four remodeling establishments, 63% of land developers, and 59% of STC companies generate under $1 million in receipts.  

Home builders are typically somewhat larger, with about 45% of companies reporting annual sales over $1 million. Among homebuilders, multifamily general contractors tend to be the largest. However, the Census Bureau did not disclose the number of the largest (with revenue over $100 million) and smallest (with revenue under $100K) multifamily and single-family custom builders in 2022. As a result, the revenue spectrum for MF and SF contractors is incomplete and is presented in a separate chart. 

Multifamily contractors are typically larger compared to single-family contractors and for-sale builders (who build on land they own and control). Ten percent of multifamily contractors reported annual sales between $10 million and 25 million, and an additional 11% earned between $25 million and $100 million in 2022.  

Under the most recent U.S. Small Business Administration (SBA) size standards, the vast majority of residential construction companies qualify as small businesses. The most recent small business size limits for all types of builders are $45 million, $34 million for land subdivision, and $19 million for specialty trade contractors. By these standards, almost all remodelers and single-family contractors, and at least 98% of land developers, and 96% of specialty trade contractors, easily qualify as small businesses. 



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Top Posts – Homeownership Rates of Family Households

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With the end of 2024 approaching, NAHB’s Eye on Housing is reviewing the posts that attracted the most readers over the last year. In September, Catherine Koh dived into data on the homeownership rate of various household types including married couples with children, married couples with no children, single parents, and others.

The homeownership rate for multigenerational households increased by 4.9 percentage points (pp) over the last decade, but there’s another household type that experienced an even larger increase in the homeownership rate over the same period—single parent households.

In further analysis of the Census’s American Community Survey (ACS) data, NAHB dives deeper into the homeownership rate for other family household types: married couples with no children, married couples with children and single parent households. In 2022, most family households were married with no children (44%), followed by married with children (26%), single parents (12%), others (12%), and multigenerational families (6%). This composition has not changed much, with the exception of a gradual decrease in the share of married with children and single parent households, which is offset by an increase in the share of married with no children households.

The homeownership rate for single parent households saw the largest gains in homeownership rate with an increase of 5.7 percentage points over the decade. However, the overall level of homeownership rate for single parent households remains the lowest among all other family household types at just 41%.    Another group that saw a large increase was the married couple with children households, with a 4.5% increase over the decade from 73% to 78%. Like multigenerational households, these increases were spurred on by historically low mortgage rates in 2021.

The only household type to have plateaued was married without children. As a matter of fact, these households saw decreasing homeownership rates for a few years before creeping back up to be at roughly the same rate as they were ten years ago at 84%. Nonetheless, married without children households remain as the group with the highest homeownership rate with an average rate of 84% over the decade.

We also examined the estimated home price-to-income ratio (HPI) for various household types. To calculate the home prices for recent homebuyers we used the median property value for owners who moved into their property within the past year. Here is where we see the effect of how multigenerational households were able to lower their HPI with pooled income and budgets. In contrast are single parent households with their estimated home prices approaching five times their income, indicating that these households are significantly burdened by housing costs.   

Given that homeownership rates jumped in recent years for most household types despite increases in home prices suggests that the low mortgage rates in 2021 made steep home prices more palatable for homebuyers to enter the market. However, it is unlikely that we’ll see a continued increase in homeownership while mortgage rates remain elevated. 

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Top Posts – How Quickly Do Prices Respond to Monetary Policy?

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With the end of 2024 approaching, NAHB’s Eye on Housing is reviewing the posts that attracted the most readers over the last year. In April, Eric Lynch examined various macroeconomic and housing finance components and their responsiveness to changes in the federal funds rate.

As economist Milton Friedman once quipped, monetary policy has a history of operating with “long and variable lags.”[1] What Friedman was expressing is that it takes some time for the true effects of monetary policy, like the changing of the federal funds rate, to permeate completely through the larger economy. While some industries, like housing, are extremely rate-sensitive, there are others that are less so. Given the current inflation challenge, the question then becomes: how does monetary policy affect inflation across a diverse economy like the United States?

This was the question that Leila Bengali and Zoe Arnaut, researchers at the Federal Reserve Board of San Francisco (FSBSF), asked in a recent FSBSF economic letter article, “How Quickly Do Prices Response to Monetary Policy” [2]. The economists examined which components that make up the Personal Consumption Expenditures (PCE) Index[3], an inflation measurement produced by the Bureau of Economic Analysis (BEA), are the most and least responsive to changes in the federal funds rate. While the Federal Reserve makes decisions “based on the totality of the incoming data”[4] including the more popular Consumer Price Index (CPI)[5] produced by the Bureau of Labor Statistics (BLS), their preferred inflation measure is PCE. This is the reason why the researchers focused on this specific index.

Figure 1 represents how selected components would be affected over a four-year period if the federal funds rate increased by one percentage point.[6] The color of the bars is separated using the median cumulative percent price decline over this period: blue is the top 50% of all declines, while red is the bottom 50%.

Both housing components (owner and renter) are classified in red or ‘least-responsive’, which might appear to be counterintuitive given how the latest tightening cycle starting in early 2022 has affected the residential industry. The NAHB/Wells Fargo Housing Market Index (HMI) declined every month in 2022, mortgage rates rose almost to 8%, and existing home sales fell to historically low levels. However, as the shelter component of CPI remains elevated, this less than expected responsive nature of housing could partially explain why the dramatic increase in the federal funds rate has yet to push this part of inflation down further compared to other categories.

Figure 2 illustrates this point by showing both groups along with headline PCE inflation with their respective year-over-year changes since 2019. The blue shaded area is when the Federal Reserve lowered the federal funds rate, while the yellow vertical line is where the Fed started the most recent tightening cycle.

The most responsive grouping (as defined by Figure 1 above) has experienced greater volatility than the least responsive grouping over this period. Especially as home prices have experienced minimal declines, this would provide further evidence for the housing components of inflation (i.e., prices) being somewhat less responsive to monetary policy. It is important to note that this does not suggest that the overall housing industry is not interest rate sensitive, but rather, that other sectors like the financial sectors responded faster.

However, and NAHB has stated this repeatedly, this “less” than expected response for housing is a function of the microeconomic situation that housing is experiencing. Shelter inflation is elevated and slow to respond to tightening conditions because higher housing costs are due to more than simply macroeconomic and monetary policy conditions. In fact, the dominant and persistent characteristic of the housing market is a lack of supply. Also, higher interest rates hurt the ability of the home building sector to provide more supply and tame shelter inflation, by increasing the cost of financing of land development and residential construction. This may be the reason for the somewhat counterintuitive findings of the Fed researchers.

The Federal Reserve has a dual mandate[7] given by Congress, which instructs them to achieve price stability (i.e., controlling inflation) and maximize sustainable employment (i.e., controlling unemployment). To accomplish the first part, the Federal Reserve has targeted an annual rate of inflation at 2%.  As Figure 2 showcases, while the headline PCE remains above this target, the most responsive grouping of PCE is, in fact, below 2% and has been for many months. This leads one to conclude that what is preventing the Federal Reserve from achieving its desired inflation target is due to the least responsive components of the index.

Figure 3 details this case with the bars representing the contributions of the two groupings (most and least responsive) to headline PCE inflation and the yellow line is the federal funds rate. The researchers were able to draw two conclusions from this chart:

“[The] rate cuts from 2019 to early 2020 could have contributed upward price pressures starting in mid- to late 2020 and thus could explain some of the rise in inflation over this period.”
“The tightening cycle that began in March 2022 likely started putting downward pressure on prices in mid-2023 and will continue to do so in the near term.”

Nevertheless, even though there are some who suggest that these monetary policy lags have shortened[8], the researchers do not believe that the drop in inflation after the first rate hike in early-2022 was a direct effect of this policy action.

As evident by Figure 3, the fight to get inflation down to target is going to be much harder moving forward, especially given housing’s least responsive nature. As the researchers concluded, “[even] though inflation in the least responsive categories may come down because of other economic forces, less inflation is currently coming from categories that are most responsive to monetary policy, perhaps limiting policy impacts going forward.”

The Federal Reserve will have to weigh this question as 2024 continues: what are the trade-offs for reaching their inflation rate target to the larger economy if the remaining contributors of inflation are the least responsive to their policy actions?

More fundamentally, if housing (i.e., shelter inflation) is not responding as expected by the academic models, policymakers at the Fed (and more critically policymakers at the state and local level with direct control over issues like land development, zoning and home building) should define, communicate, and enact ways to permit additional housing supply to tackle the persistent sources of U.S. inflation – shelter.

The opinions expressed in this article do not necessarily reflect the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System.

Notes:

[1] https://www.marketplace.org/2023/07/24/milton-friedmans-long-and-variable-lag-explained/#:~:text=long%20and%20variable%20lag.

[2] Bengali, L., & Arnaut, Z. (2024, April 8). How Quickly Do Prices Respond to Monetary Policy? Federal Reserve Bank of San Francisco.

[3]

[4]

[5]

[6] Specifically, the researchers used a statistical model called vector autoregression (VAR) which examines the relationship of multiple variables over time.  As a result, VAR models can produce what are known as impulse response functions (IRF) which can show how one variable (prices) responds to a shock from another (federal funds rate). Figure 1 is the cumulative effect (i.e., adding all four individual year effects together) of this process.

[7]

[8]

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