The Housing Market Is Still Searching for a Growth Anchor

Perc Pineda, PhD
Chief Economist, Plastics Industry Association

The housing market continues to search for a growth anchor amid U.S. economic growth, which is not without risks. High mortgage rates, inflationary pressures from the geopolitical conflict in Iran, and sluggish real personal disposable income growth continue to weigh on the housing market.

Following a 12.0% increase in housing starts in March, according to the U.S. Census Bureau, April recorded a 2.8% month-over-month decline. Setting aside monthly volatility, the housing market has struggled to find solid footing. While housing starts rose 12.0% year over year (YoY) in March and 4.6% in April, YoY changes have fluctuated between a decline of 17.4% and an increase of 12.8% over the past two years, indicating uneven underlying momentum without a sustained directional trend.

New single-family home sales also show a mixed pattern. Sales rose 8.9% in February and 7.4% in March, with YoY gains of 3.3% in March following a 1.1% decline in February. Existing home sales edged up 0.2% in April after a 2.9% decline in March. Over the past two years, new single-family home sales have also been volatile, fluctuating between a 12.0% decline and an 11.7% increase.

Fannie Mae’s latest housing outlook in May—which projects housing starts to edge down 0.4% this year and decline another 1.5% next year—reinforces the preceding view indicating uneven underlying momentum without a sustained directional trend. Specifically, in single-family homes, housing starts are expected to decrease 2.4% this year, then improve with a 0.4% increase next year. Meanwhile, multifamily homes (2+ units) housing starts are projected to increase 4.0% in 2026 before decreasing 5.5% next year.

In terms of sales, Fannie Mae projects total home sales to increase 2.1% this year and 6.7% next year. Within this, new single-family home sales are expected to decline 0.9% this year before increasing by 3.7% next year. Existing home sales are anticipated to rise 2.6% in 2026 and 7.2% in 2027.

A leading indicator of plastics demand

Housing starts data is a good indicator of plastics demand which plastics processors should pay attention to. A significant amount of plastics and plastic products are used in all phases of home building, meaning an increase in housing starts signals an increase in plastics demand in this market. The uneven outlook on housing starts—single family and multifamily—also suggests that signals from this end-market are not clear cut. The volume of plastic materials and usage differs between single-family and multifamily dwelling types. For instance, multifamily dwellings use more wire and cable, flooring, pipes, and other polymer-based materials. Given recent forecasts, it appears that plastics manufacturers would benefit from multifamily home construction more than single-family.

Stuck above 6.0%

For more than three and a half years, the weekly average 30-year fixed mortgage rate in the U.S. has stayed above 6.0%. Mortgage rates remaining above this rate have been a drag on the housing market. What could bring them down?

While the Federal Reserve has begun monetary policy easing, starting with last year’s 175 basis-point reduction in the federal funds rate, such cuts primarily affect the short end of the yield curve rather than the long end. Simply put, the federal funds rate is an overnight short-term rate that influences banks’ borrowing costs but does not directly exert downward pressure on mortgage rates, which are driven primarily by longer-term market forces.

Renewed inflation concerns

Moreover, the Federal Reserve’s recent policy path has been constrained by renewed inflation pressures, partly tied to geopolitical tensions involving Iran, which have in turn contributed to higher energy prices. As a result, inflation has reemerged as a primary concern for the Fed. Recent economic developments have led the Federal Reserve to maintain the federal funds rate at its current 3.5%–3.75% target range. While the labor market has remained resilient—with unemployment steady at 4.3% since January—inflation concerns have prevented further rate cuts over the last three Federal Open Market Committee (FOMC) meetings. With five more FOMC meetings scheduled for the year, the timing of future rate cuts remains uncertain, depending more on the path of inflation than on unemployment.

Headline inflation, measured by the year over year change in the Consumer Price Index (CPI), rose 3.3% in March and 3.8% in April, with increases driven largely by higher energy prices. In April, energy prices rose 17.9% year over year, including a 29.2% increase in energy commodities, with gasoline prices up 28.4% and fuel oil up 54.3%.

Core CPI inflation, which excludes food and energy, rose 2.8% in April. Meanwhile, the core Personal Consumption Expenditures (PCE) price index—the Federal Reserve’s preferred inflation measure—increased 3.2% year over year in March, the latest available data. While the U.S. economy expanded in the first quarter, persistent inflationary risks could slow economic growth this year.

Inflation, fiscal policy, and the path of mortgage rates

In simple terms, the 30-year mortgage rates track the 10-year Treasury note closely. The 10-year yield is driven mainly by expectations about inflation, economic growth, government financing needs, and global demand for U.S. Treasuries, which are widely viewed as a risk-free asset. Expectations that inflationary pressures will persist lead investors to demand higher yields to preserve real returns, pushing long-term rates higher. Similarly, expectations that the Federal Reserve will keep rates higher for longer signal persistent inflation, reinforcing upward pressure on yields. In addition, large fiscal deficits—reflecting concerns about fiscal sustainability and policy uncertainty—can generate further upward pressure on long-term rates; both reflecting long-term inflation and growth expectations.

Overall, the housing market continues to reflect a high-interest-rate, high-uncertainty environment, where activity is uneven across segments and cycles rather than broadly expanding. For plastics manufacturers, this reinforces a cautious but selective outlook tied closely to construction activity, with demand signals remaining more dependent on interest rates and inflation dynamics than on underlying demographic strength alone.