U.S. real GDP growth in the third quarter was revised up to an annualized rate of 5.2%, according to today’s “second” estimate from the Bureau of Economic Analysis, marking the fifth consecutive quarter of positive economic growth and the highest rate since the third quarter of 2021.
This sustained expansion of economic output underscores the economy’s resilience in the face of the Federal Reserve’s aggressive interest rate hikes over the past year and half—the effective federal funds rate rose from 0.08% in February 2022 to 5.33% in October 2023—and increases the odds of a soft landing.
The labor market has also held strong, despite some recent signs of loosening. The unemployment rate ticked up from 3.5% in July to 3.9% in October, the highest since January 2022.
What we're tracking:
But we’re not out of the woods just yet. The growth of asking rents—what residents pay to sign a new lease—has been moderating for over a year now, but there is a significant lag between changes in market rents and what is captured by CPI (what residents are currently paying). For this reason, the shelter component of inflation remains stubbornly high (even though we know it will come down). This could prompt the Fed to enact additional rate hikes.
Furthermore, monetary policy typically operates with long and variable lags, which means that we may not yet have fully felt the effects of Fed interest rate hikes already enacted, let alone any additional increases going forward.
Why this matters:
Rising interest rates have already caused both debt and equity capital to pull back from the apartment market. This higher cost of capital has made it more difficult to build new housing and caused apartment sales volume to decrease.
- Multifamily starts (5+ units in structure), when looking at a three-month moving average, fell to a seasonally adjusted annual rate (SAAR) of 365,300 units in October, down 35% from the prior year.
- The NMHC Quarterly Survey of Apartment Market Conditions recorded declining apartment sales volume for six consecutive quarters as of October. According to data from Real Capital Analytics, apartment transaction volume decreased 60% in 3Q 2023 compared to the prior year.
These rate increases also present a risk to rental housing providers and renters since a rapid rise in interest rates increases the likelihood of slower economic growth and higher unemployment in future periods.