Housing Market Write-Up

With consumer activity beginning to show signs of slowing in the past couple of months, a government shutdown would have put an additional drag on the economy in coming months. Fortunately, the U.S. dodged the economic hiccup as Congress approved a last-minute federal spending bill to keep the government open. Despite the relief, Americans have other concerns to worry about. High interest rates, the resumption of student loan payments, and rising gas prices are a few items that have kept consumer confidence down in the last couple of months. On the other hand, an improving inflation outlook and a still-solid labor market are some positives that should help the economy and the housing market weather the headwinds in the fourth quarter and carry them to a better 2024 once rates start coming down.

Inflation outlook brightens but rates remain elevated: The annual increase in prices, excluding food and energy, came in at 3.9% in August, the first time it dropped below 4% since June 2021. The core PCE price index – the Fed’s preferred inflation gauge – rose less than expected and had the smallest growth pace month-over-month since November 2020. While it is encouraging to see a cooling trend in overall prices, the optimism has not quite carried over to the mortgage finance arena. The average 30-year fixed rate mortgage went down 16 bps last Friday after the release of the inflation news but surged back up by 17 bps on the following Monday. More solid evidence of an economic slowdown will need to be seen before rates start coming down meaningfully. Also, rising oil prices heading into the fourth quarter could keep the overall inflation high in September and October. Relief, however, could be on its way to California, as an early switch to the cheaper winter-blend of fuel has been approved by the California Air Resources Board last Thursday.    

Consumer confidence slips again as anxiety about the future grows: Rising gasoline prices and high interest rates weighed down consumers’ confidence last month, as the Conference Board’s Index fell to a four-month low. The drop of 5.7 points in the index was the biggest monthly decrease since December 2020. While the present situation component of the index inched up in Septembers, the sharp decline of 10 points from 83.3 in August to 73.7 in September suggest that Americans were concerned about their short-term outlook. The looming threat of a government shutdown, the resumption of student loan payments, and higher prices in groceries and gasoline were contributing factors to lower confidence reading in the past couple of months. Consumers are also growing more worried about the labor market, as those who reported jobs as hard to get inched up 4bps to 13.6% in September. The dip in confidence in recent months could translate into spending declines and slower economic growth in Q4 if the trend continues.

New home sales drop to 5-month lows: August sales of newly constructed single-family homes pulled back as rising mortgage rates began to weigh on new housing demand. New home sales declined 8.7% in August from July’s 739,000 units but increased 5.8% from 638,000 units recorded in August 2022. Home prices dipped slightly from 12 months ago, with last month’s median registering $430,300, a drop of $10,000 from a year ago. The dip in price of new home sales was due partly to builders using price cuts as incentives to reinvigorate buyer interest as mortgage rates continued to climb. The recent surge in rates is adding more stress to buyers and begins to take the momentum out of new housing demand. Elevated costs of borrowing may continue to slow sales in September and October as market indicators showed a decline in buyer traffic in both August and September.

Construction spending continues to trend up: Despite a pullback in new home sales, construction activity remained resilient in August. Total construction spending improved again for the eighth consecutive month with a year-over-year gain of 7.4%. Overall, residential construction outlays climbed again by 0.6% on a month-over-month basis but dipped below last year’s level by 3%. Single-family housing starts inched up solidly from July as developers remained cautiously optimistic about new housing demand in the future, despite the high mortgage rate environment in the near term. Multifamily projects, on the other hand, appeared to be slowing down and could be leveling off as multifamily construction spending inched up a more modest 0.6% from July. High financing costs and a flood of apartment units set to be delivered in coming years is likely the primary reason for the moderation in construction activity in this area.