Monetary policy affects interest rates, which affect mortgages, which affect decisions in the housing market. That may be easy to understand, but the housing data may not have such clear-cut patterns. Let’s see what FRED has to show us.
The red line in the graph is the average 30-year fixed-rate mortgage (right axis) from the early 1970s to 2019. The blue line in the graph is the ratio of housing starts built by contractors over housing starts built by owners (left axis) for the same period.
From 1985 to 2007, this ratio was generally flat, around 1.5, implying contractors built approximately 60% of housing starts. But during episodes of macroeconomic turbulence, the ratio has diverged from its historical average. But not in a consistent way… In the late 1970s and early 1980s, this ratio declined sharply, to below 1.0. This implies individual owners built more housing starts than developers during this period. But during the Great Recession, this ratio increased sharply, to over 2.0, peaking at 2.6 in 2016, which implies contractors built 72% of housing starts.
Why would the ratio plummet in the late 1970s and rise sharply in the late 2000s? In both cases, GDP declined and unemployment rose, but this housing measure behaved differently.
Maybe you’ve already seen it, but a clear difference between these two episodes is the level of mortgage rates: Rates were much higher in the 1970s and 80s and much lower leading up to and through the Great Recession. As mortgage rates go up, the ratio goes down and vice versa. A potential reason is that, as the price of mortgages increases, the cost of purchasing a new home from a contractor increases relative to the cost of building one’s own home. And, if the costs are basically the same, many would-be homeowners might choose to build their own home rather than purchase one that someone else built.
The late 1970s was a period of high inflation; in an effort to reduce inflation, the Federal Reserve imposed higher interest interest rates, which included mortgage rates. In contrast, during the Great Recession, the Federal Reserve slashed interest rates and, by extension, mortgage rates. It looks like homeowners respond to changes in these interest rates: building their own houses to try to economize on the financing during periods of high rates and purchasing new houses from contractors during periods of low rates.
How this graph was created: Search for “New Privately Owned Housing Starts” and select “Contractor-Built-One-Family Units, Thousands of Units, Seasonally Adjusted.” From the “Edit Graph” panel, under the box “Modify frequency,” select “Semiannual.” Use the “Customize Data” option to search for “New Privately Owned Housing Starts in the United States by Purpose of Construction, Owner-Built One-Family Units” and select “Thousands of Units, Seasonally Adjusted.” This latter series is now labeled as b. Under “Customize data,” type a/b into the “Formula” box and select “Apply” to get the ratio of the two series. Now select “Add Line” and search for “30-Year Fixed Rate Mortgage Average in the United States, Percent, Semiannual, Not Seasonally Adjusted.” Under the box “Modify frequency,” select “Semiannual.” Under “Format,” under the option for “LINE 2,” select “Y-Axis Positon” as “Right.”
Suggested by Matthew Famiglietti and Carlos Garriga.