Are We There Yet?

Are we there yet? Children ask that question endlessly on a long car trip. Federal Reserve officials are asking it about their drive to curb inflation.

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What has been a quiet hum of concern about the housing market has grown louder, reflected in the comments of industry analysts and in headlines such as these: “Home Buyer Demand Cools Off”; “Housing Market Showing Signs of Cracking”; “Is the High-Flying Housing Market Heading for a Fall?”

Economic reports for June indicate that some key trend lines have begun to shift. Home buyer confidence, housing demand, sales of new and existing homes, pending sales and new home construction all declined. Taking those markers in order:

-Redfin’s Housing Demand Index registered its steepest year-over-year decline (9.6 percent) in fell by 9.6 percent in more than two years, as both the number of people asking to see homes and the number making offers on them dipped.

-Fannie Mae’s Home Purchase Sentiment Index fell by 1.6 points to 90.7, reversing survey highs reached in April and May. “Tight supply and lackluster income growth continue to weigh on housing activity, and consumer expectations for home price growth over the next 12 months have moderated,” Doug Duncan, Fannie’s chief economist, said in a press statement.

-Existing home sales declined for the third consecutive month in June, falling 0.6 percent behind a downwardly revised May total, and landing 2.2 percent below the year-ago pace. Pending sales increased modestly but remained more than 2 percent below the 2017 level. Lawrence Yun, chief economist for the National Association of Realtors (NAR) blamed the scant inventory of homes for sale that has constrained sales for most of this year and that, he said “is not releasing its grip on the nation’s housing market.”

-New home sales lagged the May total by 5.3 percent, but still managed to hang on to a year-over-year 2.4 percent edge over 2017’s lackluster performance.

-New home construction plummeted, falling more than 12 percent below the 2017 pace. Single-family starts were off 0.2 percent for the year and 9.1 percent lower than in May; multifamily starts lagged by 20.2 percent for the month and 15.3 percent for the year. Permits for new construction don’t suggest any significant near-term improvement: Single-family authorizations were only 4.6 percent above a year-ago pace that analysts agree fell far short of the production level needed to match current and pent-up housing demand.

A Closer Look

Most of the decline in existing home sales occurred at the low end of the market (below $250,000) where buyers are most sensitive to prices and interest rates – both of which have been increasing

Home prices, measured by the S&P CoreLogic Case-Shiller national index, increased at an annual rate of 6.4 percent – below the pace set for most of this year, but still outdistancing the inflation rate and wage gains for most Americans.

That gap appears to be leading more prospective buyers to hit the pause button, suspending their search for a home they can afford if not abandoning their hope of finding one. One indicator of this response: Inventory levels actually increased somewhat, posting the first year-over-year increase (albeit a miniscule 0.5 percent) in three years.

“It's too soon to tell whether this is the start of a broader cooling or simply a return to something more like balance in places that had become extreme seller's markets," he said. Pete Ziemkiewicz, head of analytics at Redfin, told Bloomberg News.

Economist Robert Shiller, who anticipated the last housing collapse, says he’s not ready to predict another one. “But this could be the very beginning of a turning point” in the housing market, he told reporters recently.

Turning Point or Pause?

Analysts differ on whether the market is turning or pausing and, if this is a turn, whether hit will be gentle – just enough to turn heads – or sharp enough to induce whiplash. But the statistics suggest that the steady price gains that have signaled the housing recovery have begun to undercut it.

“Even in the hottest markets, there is a limit to affordability, and the limit is clearly now being hit,” a CNBC article suggested.

Although home prices are still rising, the appreciation rate has begun to moderate, with contradictory results: Affordability pressures may ease for some buyers, but their sense of urgency about buying a home may also diminish.
“Home prices are plateauing,” Ed Stansfield, chief property economist at Capital Economics Ltd., told Bloomberg News. “People are saying: ‘Let’s just bide our time, there’s no great rush. If we wait six or nine months we’re not going to lose out on getting a foot on the ladder.”

Potential Drag on Growth

With home sales trending downward, at least for now, some analysts are warning that weakness in this sector could shave several points from overall economic growth.
“Weakness in housing raises a large red flag regarding the sustainability of domestic growth heading into the second half of the year,” Lindsey Piegza, chief economist for Stifel, told Housing Wire. “After all, existing home sales help drive other sectors of the economy including consumer confidence and spending, as well as construction and lending activity.”

Aaron Terrazas, senior economist for Zillow, put it even more starkly in an interview with the Wall Street Journal: “The housing market led the general economy out of the recovery and now it’s leading” it toward a slowdown.

There is no evidence of that slowdown yet. Employers added 157,000 jobs in July, fewer than the 190,000 analysts had expected, but still an extension of a trend that has produced an average of 215,000 jobs per month since the beginning of this year. Wage gains remain sluggish – the year-over-year-gain was unchanged at 2.7 percent. The economy, meanwhile, grew at a better-than-expected 4.1 percent adjusted annual rate in the second quarter, fueled primarily by energetic consumer spending levels.

The Federal Reserve left its target federal funds rate unchanged in June, but Fed Chair Jerome Powell told lawmakers recently that policy makers still see “gradual” rate hikes as “the best way forward.” Analysts are expecting another quarter-point increase in September, and one more before the end of the year.

In Search of Good News

While signaling the Fed’s confidence in the economy, the rate increases will also make homebuying more expensive. The rate on a 30-year fixed rate mortgage was averaging 4.57 percent in June, up from 4.03 percent in January. This cuts two ways in the housing market – both negative: It increases affordability pressures on prospective buyers and makes it less likely that prospective sellers with a low rate on their existing mortgage will want to trade it for the higher rate on the mortgage they would need if they sold their existing home and purchased another one.

The bottom line: Fewer new listings in a market starved for them, and more headwinds for buyers, who are already being sidelined by cost constraints.

“Long story short,” an article in Housing Wire noted, “homebuyers need some good news– a drop in interest rates, relief from climbing home prices or a significant wage increase, maybe all three– in order to turn the tide on these homebuying blues.”

Maybe future reports will contain some of that good news; you won’t find much of in this one.