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As much of the economic data for the first quarter of 2019 illustrates, lower interest rates alone are not sufficient to add sustained momentum to the housing market. So what’s missing?

Start by examining the path of mortgage rates over the past year. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage was roughly 4.5% in April 2018. Rates began to rise in September, and peaked at just below 5% in November. Led by Treasuries, mortgage rates began to fall in December, and declined to 4.1% by late March 2019 due to dampened economic growth expectations and a more dovish monetary policy stance from the Federal Reserve.

However, housing activity had only a limited response. The National Association of Realtors (NAR) reported that existing single-family home sales increased more than 12% in February, but those gains were given back in March. Existing single-family home sales volume in March was down almost 5% compared with the same month in 2018, despite the fact that mortgage interest rates were lower and available for-sale inventory was higher. Newly built home sales performed better, up 1.7% for the first quarter compared with the first quarter of 2018, but much of that improvement was due to production and price shifts to the lower end of the market.

As the new-home sales data proves, the missing variable for ongoing growth for new and existing home sales is pricing. Income growth is beginning to accelerate due to a tight labor market and economic efficiencies unlocked by pro-growth tax reform. However, household incomes have not kept pace with rising home prices post-recession, leaving housing affordability challenged. According to the NAHB/Wells Fargo Housing Opportunity Index, at the start of 2012, 78% of home sales (new and existing) were affordable to a typical family based on income; today, that rate is 57%.

The NAR resale data shows that home sales are down year-over-year at the top and bottom ends of the market. March data shows a year-over-year 4.8% decline in existing home sales priced from $100,000 to $200,000. This is due to tight inventory and lack of new-home construction in this price range. Sales in the $750,000 to $1 million range were down 5.6% compared with a year prior. The higher end of the housing market has the opposite challenge: available inventory and lack of demand.

What are the takeaways for builders from the early 2019 data? First, the recent declines in interest rates alone cannot sustain significant market expansion for building. Pricing and income are key to this equation.

Second, construction volume growth can be achieved at the entry-level of the market in those locations where development and construction costs will permit affordable homes to be built. In metro areas where home prices have been pushed higher in recent years due to rising construction and regulatory costs, market conditions in the near-term will continue to be challenging. In such markets, builders need to work with home builders associations to make the advocacy case for bending the cost curve to tackle local housing affordability challenges.