Fed Is Staying the Course on Interest Rates, Housing Is Feeling the Impact

 The overheated employment market appears to be cooling off, but probably not fast enough to demonstrate the progress the Federal Reserve wants to see in its efforts to combat inflation, still growing at an uncomfortable 8 percent annual rate.

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The housing slowdown some analysts have been predicting for more than a year has arrived – perhaps.  That’s not a unanimous view, but it does reflect what appears to be a growing consensus, supported by an array of negative indicators that are becoming harder to dismiss or to ignore.

We can start with a few recent  comments from analysts who:

  • Describe the housing market as “savagely unhealthy”;
  • Say the market is “in the beginning stages of the most significant contraction in activity since 2006”; and
  • Warn that we are already “in the midst of the biggest slowdown in over a decade.”

Analysts are focusing on four key measures of housing market health:  Mortgage rates, home sales, home prices and inventories, all of which are looking decidedly unhealthy.

Mortgage rates have been rising steadily as the Federal Reserve continues its campaign to throttle inflation. The Federal Open Market Committee (FOMC), the Fed’s policy-making arm, approved  the  second consecutive 75 basis-point increase in the Fed’s benchmark rate in July and indicated that additional rate hikes are likely – a prediction that came before July’s unexpectedly strong employment report dashed hopes that inflationary pressures might be easing. 

Although mortgage rates have inched back below 5 percent after hitting a 13-year high of 5.81 percent in June, Sam Khater, Freddie Mac’s chief economist, predicts that rates will remain elevated and volatile “especially as the Federal Reserve attempts to navigate the current [uncertain] economic environment.”


Affordability Barriers

The combination of higher rates and rising home prices has slammed the door on many prospective buyers trying to enter the market.  The National Association of Realtors (NAR) reports that home purchase costs were almost 80 percent more expensive in June than in the same month three years ago. As a result, the NAR says, nearly 25 percent of the buyers who purchased homes in 2019 could not qualify for the loan they need to purchase a median-priced home today.

Existing home sales reflect those affordability problems. June sales fell to a seasonally adjusted annual rate of 5.12 million in June, 5.4 percent below the May level and 14.2 percent below June of 2021, the largest year-over-year decline since May of 2020, according to the NAR. Pending sales, an indicator of future transactions, fell by almost 20 percent compared with the prior year. 

With inventory levels still depleted, homes are still selling quickly; the average days on market is remains unchanged at around 32 days, according to the NAR.  But  Danielle Hale, chief economist for Realtor.com, thinks the market winds are beginning to shift.  “For the first time in two years, weekly data show that homes aren’t selling faster than in the prior year,” she explains in a recent analysis. “They’re not yet taking longer to sell, but if recent trends continue, an increase in the time a home sits for sale is on the horizon, [and] that should eventually help alleviate buyers’ sense that they need to rush to make an offer.”



Inventory Shortage

A slower sales pace appears to have eased what has been a chronic inventory shortage.  The number of existing homes on the market increased by almost 2 percent in June compared with the same month last year, the first annual increase since July of 2019, according to the NAR.  That translates to a 3-month supply of available homes at the current sales pace, up from 2.6 months in May and 2.5 months in June of last year.

But the number of new listings has been declining. The six percent year-over-year dip in the week ending July 23 was the third consecutive weekly decline in this indicator, the NAR reports.  Realtor.com’s  Hale thinks some prospective sellers have been  “panicked” by the decline in home sales and rising mortgage rates, and are waiting until trends shift back in their favor. 

“If sellers get spooked that they’ve ‘missed the peak’ the market will stagnate,” she warns.

Higher mortgage rates, which are keeping many buyers out of the market, are also affecting sellers, who would have to trade the low rate on their existing mortgage for the higher-rate loan they would need to purchase a replacement home. 

That trade-off looks less appealing now that homes are no longer selling consistently above their asking price. Redfin reports that 55.5 percent of homes sales hit that mark in June compared with 56.4 percent the same month last year.  Although the median listing price is still increasing overall, 14.6 percent of sellers cut their asking prices in June, according to Redfin, almost double the year-ago rate.


Shifting Dynamics

“Home prices have not retreated, [but] homeowners seem to be aware of the shifting market dynamic,” Realtor.com’s Hale notes in her recent analysis.

Conditions in the new home market are also shifting. June’s annual sales rate of 590,000 was 8.1 percent below the revised May pace and down 17 percent year-over-year. New home starts and permits have also declined as builders adjust their construction pace to match declining buyer demand.

The National Association of Home Builders’ (NAHB) monthly confidence index fell by 12 points in July, the second-largest decline ever for this market barometer; 13 percent of the builders responding to this survey said they have reduced prices, offered incentives or both in the past month in an effort to boost sales or avoid cancellations.

“This was an accident waiting to happen,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to investors.  “Homebuilders have been in denial about the extent of the drop in demand, despite mortgage applications falling by more than a quarter over the first half of the year, with no end in sight to the decline,” he added. “Now, they are acknowledging reality.”

In what analysts describe as a significant change, builder incentives, which have been linked primarily to the mortgage, now include discounts on options and on lot prices. 

“We have to work harder to sell homes. We have to be more nimble,” Ryan Marshall, CEO of Pulte Homes, said in a recent conference call with investors, reported by CNBC.com.


Prices Still Rising

Although virtually all of the key market indicators have been trending downward, home prices continue to rise.  For the week ending July 16, the NAR’s median home sales price jumped by 16.6 percent year over year, marking the 31st consecutive week of double-digit price increases.  But the rate of increase for the month – 11.2 percent ─was the smallest year-over-year gain in two years, according to the NAR. 

The closely-watched S&P CoreLogic Case-Shiller price index also slipped in May, recording a 19.7 percent annual increase compared with 20.6 percent in April. Although limited inventories continue to keep upward pressure on prices, Craig Lazarra, managing director at S&P DJL told DS News, rising interest rates and “a more challenging macroeconomic may not support extraordinary home price growth for much longer.”

 “We’ll eventually see renewed slowing in price growth.,” Realtor.com’s Hale agrees. ‘But when that will happen is still anyone’s guess.”