Despite slowing activity in the housing market, supply remains tight. Plus, the Fed’s latest rate hike caused volatility in the markets. Here’s what you need to know:
- Fed Hikes Rates Another 75 Basis Points
- Low Housing Inventory Remains Supportive of Prices
- Household Formations Continue to Outpace Completions
- More Home Builders Offering Incentives as Confidence Wanes
- Low Jobless Claims Show Labor Market Remains Tight
Fed Hikes Rates Another 75 Basis Points
As expected, the Fed hiked its benchmark Fed Funds Rate by an aggressive 75 basis points at its meeting last Wednesday. This follows the 25, 50, 75 and 75 basis point hikes the Fed previously made at their March, May, June and July meetings, respectively.
What’s the bottom line? The Fed now expects an additional 125 basis points of hikes this year, which may be 75 basis points at their November 2 meeting and 50 basis points at their December 14 meeting. In addition, the Fed anticipates inflation, as measured by Core Personal Consumption Expenditures, to be at 4.5% at the end of 2022, which is not a lot of progress from currently levels towards their goal of 2%.
The Bond market digested the Fed’s projections negatively, as they gave the impression that the Fed does not have a handle on inflation, which the Bond market hates. It will be important to see if the Fed can convince investors and the markets that they have a handle on inflation, as this will play a crucial role in the direction of Mortgage Bonds and mortgage rates this fall.
Low Housing Inventory Remains Supportive of Prices
Existing Home Sales fell 0.4% from July to August to a 4.8 million unit annualized pace, per the National Association of Realtors (NAR). This was stronger than expectations of a 2.5% decline. Sales were also down 19.9% when compared to August of last year. This is a critical report for taking the pulse of the housing market, as it measures closings on existing homes, representing around 90% of the market.
What’s the bottom line? Activity in the housing market has certainly slowed, but home prices are still being supported by continued low inventory. Plus, the increase in stock every summer from parents listing their homes, so their kids are settled for the new school year appears to have crested.
The number of available homes fell from 1.31 million at the end of July to 1.28 million at the end of August, which equates to a 3.2 months’ supply of homes. Six months is considered a balanced market. This data speaks to the ongoing imbalance of supply and demand, which should continue to be supportive of home prices.
In addition, there were only 779,000 “active listings” in August, which means that 39% of the “inventory” in the Existing Home Sales report is under contract and not truly available. This speaks to demand, as a normal market has 25% of inventory under contract. When looking at the months’ supply of available homes for sale, it’s really 1.9 months.
Household Formations Continue to Outpace Completions
August brought a surprising increase in home construction as Housing Starts, which measure the start of construction on homes, were up 12.2% from July. While the largest increase was in multi-family units, starts for single-family homes were also up 3.4% from July. When compared to August of last year, Housing Starts were essentially flat, but single-family starts were 14.6% lower this year. This is a disappointment because single-family homes are in such high demand among buyers and speaks to ongoing tight supply.
Building Permits, which are indicative of future supply, declined 10% from July to August and they were also 14.4% lower when compared to August of last year. Permits for single-family homes fell 3.5% for the month and 15.3% year over year.
What’s the bottom line? While interest rates are higher and demand is lower, supply still remains tight. The slowing of new construction and low supply may hurt economic activity, but from a home price standpoint it will be somewhat supportive. This is very different from the housing bubble, where demand was waning, but supply of new homes was significantly increasing.
More Home Builders Offering Incentives as Confidence Wanes
The National Association of Home Builders (NAHB) Housing Market Index, a near real-time read on builder confidence, fell 3 points to 46 in September – the ninth straight monthly decline. All components of the index also declined, with current sales conditions falling three points to 54.
What’s the bottom line? Any reading above 50 on this index, which runs from 0 to 100, signals expansion, while readings below 50 signal contraction. August and September were the first time the index dropped below 50 since May 2020. The decline in these readings shows that builders are anticipating a further slowdown.
NAHB chief economist Robert Dietz noted that incentives appear to be back as more than half of the builders surveyed used incentives to bolster sales, including mortgage rate buydowns, free amenities and price reductions.
Low Jobless Claims Show Labor Market Remains Tight
The number of people filing for unemployment benefits for the first time rose by 5,000 in the latest week, as 213,000 Initial Jobless Claims were reported. However, the previous week’s Initial Jobless Claims were revised lower by 5,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, decreased by 22,000 to 1.379 million.
What’s the bottom line? Layoffs and, in turn, Initial Claims appear to have slowed in recent weeks, showing that the labor market remains tight and we’re still waiting for that recession-indicating sustained uptick in filings for unemployment.
What to Look for This Week
More housing reports are ahead, beginning Tuesday with home price appreciation data for July from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index. August’s New and Pending Home Sales will be reported on Tuesday and Wednesday, respectively.
Ending the week, crucial inflation numbers for August will be reported Friday via the Fed’s favored measure, Personal Consumption Expenditures.
Mortgage Bonds showed some resilience on Friday, ending the day nearly flat and above the important 98 level after being down sharply intra-day. The 10-year ended last week at 3.68%, beneath an important ceiling. The market has been extremely volatile and difficult to predict, but now that the Fed meeting is behind us and after a strong end to the day on Friday, we can see if Bonds can muster a relief rally.
By: Dawn Palestini
Homebridge Financial Services
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