Price growth is likely to moderate noticeably in the coming quarters, economists say.
A downturn in the US housing market probably has further to run as buyers shy away and borrowing costs push higher, according to economists at Goldman Sachs Group Inc.
Weakening demand is shrinking an imbalance with housing supply and likely means that price growth will slow sharply over coming quarters, economists led by Jan Hatzius said in a research note on Tuesday.
“We expect home price growth to stall completely, averaging 0% in 2023,” Goldman said. “While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.”
Goldman’s housing assessment comes just days after Federal Reserve Chair Jerome Powell issued a fresh warning to investors that interest rates are heading higher and will stay there “for some time.”
In its analysis, Goldman said a sustained reduction in affordability, waning pandemic tailwind and a recent decline in purchasing intentions all point to weakening home sales.
“Higher mortgage rates and reduced affordability are not the only drag on housing,” the Goldman economists said.
“Existing home sales and building permits have fallen more sharply this year in regions where they increased the most in the earlier part of the pandemic, suggesting that the recent declines have also reflected the partial retreat of a pandemic-related boost to housing demand.”
Other factors at play include housing inventories starting to normalize and starts beginning to rebound, though supply constraints will limit completions, it added.
The central bank looks set to continue on its current path to cool prices.
Federal Reserve Chair Jerome Powell issued a fresh warning to investors doubting his resolve to fight inflation: interest rates are heading higher and will stay there “for some time.”
The message from Jackson Hole -- hammered home by Powell in a terse five-page speech Friday and endlessly repeated by his colleagues -- is that the central bank will not blink in the fight to cool prices.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell told the audience at the Fed’s annual retreat in Wyoming’s Grand Teton National Park. “The historical record cautions strongly against prematurely loosening policy.”
“Higher for longer is the new watchword,” said Peter Hooper, global head of economic research for Deutsche Bank AG.
Equity prices tumbled as the message was absorbed, with the S&P 500 closing 3.4% lower for its worst day since mid-June.
Recent readings on the US economy have been mixed, with the labor market still strong but demand cooling in some places, particularly the housing market, and a number of economists see serious risks of recession next year.
Tellingly, Powell spelled out that running a sustained, tight policy until inflation turns lower was going to bring “some pain” to households and businesses.
“There is no talk of a soft landing here,” said Derek Tang, an economist at LH Meyer, a policy analysis firm in Washington, referring to the hope the Fed can get inflation back to its 2% target without causing a sharp rise in unemployment or recession.
Promising to keep policy tight “lends credibility to coming rate hikes,” he said. “The level of rates is only restrictive if they raise and promise to hold there for a while.”
Powell’s remarks at the retreat, which gathers top policy makers from around the world, come as US central bankers confront the highest inflation in 40 years. Officials were slow to spot the risk -- Powell’s speech at Jackson Hole a year ago argued that price pressures were narrowly based and would wash out -- and are now moving aggressively to keep prices from accelerating further.
Officials raised rates by 75 basis points at each of their last two meetings and signaled the same could be on the table again when they gather next month. Powell said that the size of the increase in September would be determined by the “totality” of the incoming data.
Other Fed policy makers were on message in their remarks on the sidelines of the conference.
“I want to see our policy get to something that’s marginally restrictive,” Atlanta Fed President Raphael Bostic told Bloomberg Television before Powell spoke, adding that he thinks rates should go up by 100 to 125 basis points above current levels. “In terms of staying there, I think we should stay there for a long time,” he said.
Bostic said the economy has to weaken first before inflation starts to move down, and that such a shift would typically require the Fed to hold rates at higher levels for 18 months to two years.
However, he said that the economy has been evolving more quickly during the pandemic. “There is the possibility that the movement in inflation could be faster than what we’ve seen in the past,” Bostic said. “The reality is, we don’t know what’s going to happen.”
Fed officials also voiced explicit dissatisfaction with bets in financial markets that rates will peak below 4% next year and then be cut in the later part of 2023.
“This ‘some time’ is forward guidance,” said Roberto Perli, head of global policy research at Piper Sandler & Co. “They have to use it because the market thinks they are going to act as they have over the past 30 years: At the first sign of weakness, they cut. ‘Some time’ is vague enough -- it could be two meetings or two years.”
The strategy to raise and hold has its roots -- albeit in an opposite fashion -- in the way the Fed handled deflationary risks years ago.
Faced with ultra-low inflation in 2003 as the economy struggled out of a recession, then-Fed Governor Ben Bernanke argued in favor of using communications to reinforce the message that the Fed was committed to moving inflation away from deflation risks by keeping policy lower for longer.
t that year, saying the risk of inflation remaining too low merited keeping policy accommodation in place “for a considerable period.” While ‘some time’ is less descriptive, it is the same kind of commitment strategy.
Such guidance is aimed at shaping public expectations, a topic Powell also touched on in his speech.
He said many measures of inflation expectations are anchored. But he also said this was not grounds for “complacency” with inflation having run well above the 2% target for months. Government data earlier Friday showed the Fed’s preferred price measure rose 6.3% for the 12 months through July.
Anna Wong, Bloomberg’s chief US economist, said central bankers’ knowledge about how to forecast expectations is limited.
What’s more, the public’s lived experience of inflation has nothing to do with the assurance provided from surveys suggesting expectations are nothing to get alarmed about, making it risky for a central bank to rely on them.
“The Fed is clear-eyed about the costs of expectations becoming unanchored,” she said.
Purchases of goods and services ticked slightly upward in July.
Americans’ income and spending posted sluggish increases in July, even while they got some relief on prices, indicating the economy is feeling the pinch from the highest inflation in a generation.
Purchases of goods and services, adjusted for changes in prices, increased 0.2% after being flat a month earlier, Commerce Department data showed Friday. The median estimate in a Bloomberg survey of economists was for a 0.4% advance.
The personal consumption expenditures price index, which the Federal Reserve uses for its inflation target, fell 0.1% from a month earlier and was up 6.3% since July 2021. That’s still a long ways from the central bank’s 2% target.
Excluding food and energy, the price index was up 0.1% in the month. The core measure was up 4.6% from a year ago, a slight deceleration from the previous month.
The weaker-than-expected report suggests the backbone of the economy started the third quarter on rockier footing than previously thought. While a robust labor market paired with sizable and sustained wage increases has supported consumer spending in recent months, widespread inflation is eroding those gains.
And the outlook is growing increasingly murky. The Fed is aggressively raising interest rates to tackle price pressures, and the ensuing surge in mortgage rates has prompted a sharp slide in the housing market. The trajectory of consumer spending will largely determine the path of the overall economy.
Inflation of up to 5% will persist for years, says chairman.
The Western world can expect to live with inflation running between 4% and 5% for years, and sharply lower asset prices as a result, according to Pascal Blanque, chairman of the Amundi Institute.
The new environment comes as policy makers balk at the risks to growth needed to quash decades-high price growth, said Blanque, a former chief investment officer of Amundi SA. Central banks will end up prioritizing nominal growth and “tolerating” higher inflation with relatively low real-interest rates, he said.
This adjustment to higher-for-longer inflation, following a decade where US headline inflation averaged 2%, will involve a complete rethink in valuations from the equilibrium price-to-earning ratios in stock markets to the level of bond yields, according to Blanque. The 12-month trailing price-to-earnings ratio of the S&P 500 is approximately 13% above where it was during historical periods of 3% to 6% inflation, according to Amundi Institute calculations.
“We will see more noise in terms of the volatility of inflation itself, which will lead some people to think that the beast is dead or retreating -- which may prove to be a trap,” Blanque said in an interview. He served as the CIO of Europe’s biggest asset manager for more than a decade before joining its research arm in February.
The Federal Reserve has already delivered the fastest pace of tightening since the early 1980s in two consecutive 75-basis-point rate rises, while the European Central Bank abandoned forward guidance at its last rate decision in a surprise 50-basis-point hike. Yet these actions are not the “abrupt policy regime shift” needed to bring inflation to target, Blanque said.
“Markets are already pricing to some extent the fact that inflation will be under control due to the action of the authorities and, due to some luck, inflation retreating on its own,” Blanque said. “The market has priced in the success of the battle before it has really started.”
Central banks have benefited from the role of China and Asia in helping keep inflationary forces in the world economy at bay, he said. But the decades of easy monetary and fiscal policy in response, from quantitative easing to expansive spending policies by governments, has instilled a belief in markets that policy will always be accommodative.
That’s making it harder to tighten financial conditions enough to damp price pressures. “You’ve got to convince the markets and economies that you are serious about turning the corner in terms of tightening,” he said. “That’s probably where the credibility challenge lies.”
Since reaching a peak in June, financial conditions in the US and the euro area have actually loosened, according to Goldman Sachs gauges. Expectations that inflation may be quashed have started to take hold, with a looming recession in Europe giving way to the idea that a crunch in consumption could help bring inflation down. Meanwhile, a cooler-than-expected US inflation print for July gave rise to hopes that central bank officials may find evidence to slow their tightening.
“At the end of the day there is likely to be a compromise in the policy mix where monetary policy will stop one way or the other below neutrality,” said Blanque. “That means tolerating a higher trend of inflation and this is what is not fully priced in the markets.”
Decline reflects the recent retreat in mortgage rates, expert says.
Pending home sales fell for the second month in a row and for the eighth time in the past nine months, according to the National Association of Realtors.
Based on contract signings, pending home sale transactions dropped to 89.9% in July – down 1% month over month and 19.9% year over year.
In terms of the current housing cycle, NAR chief economist Lawrence Yun said the market may be at or close to the bottom in contract signings.
“This month’s very modest decline reflects the recent retreat in mortgage rates,” he noted. “Inventories are growing for homes in the upper price ranges, but limited supply at lower price points is hindering transaction activity.”
Housing affordability in June reached its lowest level since 1989, according to NAR. The monthly mortgage payment on a typical home climbed 54% annually to $1,944 (accounting for a 30-year fixed-rate mortgage and a 20% down payment).
“Home prices are still rising by double-digit percentages year-over-year, but annual price appreciation should moderate to the typical rate of 5% by the end of this year and into 2023,” Yun said. “With mortgage rates expected to stabilize near 6% alongside steady job creation, home sales should start to rise by early next year.”
New home sales in July also did not meet expectations, plummeting 12.6% to a 511,000 annualized rate. Danushka Nanayakkara-Skillington, assistant vice president for forecasting and analysis at the National Association of Home Builders, said the sharp drop in new home sales is another clear indicator that housing is in a recession.
“The combination of higher prices and increased interest rates are generating a notable slowing of the housing market,” Nanayakkara-Skillington added.
"There are still potential homebuyers on the sidelines waiting to jump back into the market".
Mortgage rates continue to fluctuate, with the average 30-year fixed-rate home loan swinging back up to 5.55% as the once-robust housing market weakens.
The long-term mortgage rate jumped 42 basis points from last week to a two-month high of 5.55%, according to Freddie Mac’s Primary Mortgage Market Survey. A year ago, at this time, the 30-year mortgage was 2.87%.
The 15-year fixed-rate mortgage rose to 4.85%, up 35 basis points from the previous week and from 2.87% at this time in 2021. Meanwhile, the 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.36%, down from 4.39% last week and more than two percentage points higher than the 2.42% average a year ago.
“The combination of higher mortgage rates and the slowdown in economic growth is weighing on the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Home sales continue to decline, prices are moderating, and consumer confidence is low. But, amid waning demand, there are still potential homebuyers on the sidelines waiting to jump back into the market.”
Mortgage applications for the week ending August 19 dwindled 1.2% week over week on a seasonally adjusted basis, according to the Mortgage Bankers Association. Refinance application activity was down 3%, and purchase application volume dropped 1% from the prior week.
“Mortgage applications continued to remain at a 22-year low, held down by significantly reduced refinancing demand and weak home purchase activity,” said Joel Kan, AVP of economic and industry forecasting at MBA. “Last week’s purchase results varied, with conventional applications declining 2% and government applications increasing 4%, which is potentially a sign of more first-time homebuyer activity.”
Mortgage lending in slump as homebuying "simply unaffordable".
Refinance lending fell 36% during the second quarter of this year, according to the latest report by real estate data provider, ATTOM.
The US Residential Property Mortgage Origination report shows that mortgage origination was down 13% from Q1 this year (2.39 million mortgages), representing the biggest annual drop since 2014.
Reflecting a year-long decline and the fifth quarterly decrease in a row, it was down 40% compared with the same period last year, while the dollar volume of refis was also down 56% annually to $310.1 billion.
The decline was attributed mostly to another double-digit downturn in refinance activity due to mortgage rate rises, which more than outweighed increases in home-purchase and home-equity lending, ATTOM said.
To compile the report, ATTOM recorded mortgage and deed of trust data for single-family homes, condos, town homes and multi-family properties of two to four units.
The report said: “For the first time since early 2019, refinance activity in the second quarter did not represent the largest chunk of mortgages, dropping to 39% of all loans. That was off from 53% in the first quarter and from a recent peak of 66% in early 2021.”
Rick Sharga, executive vice president of market intelligence at ATTOM, blamed soaring mortgage rates for the slump in refi loan volume, adding that it was having a knock-on effect on purchase loans.
He said: “Mortgage rates that have virtually doubled over the past year have decimated the refinance market and are starting to take a toll on purchase lending as well.
“The combination of much higher mortgage rates and rising home prices has made the notion of home buying simply unaffordable for many prospective buyers, which threatens to drive loan volume down even further as we exit the spring and summer months.”
The downturn in total activity resulted from just 941,000 residential loans getting rolled over into new mortgages during Q2 - a figure that was down 36% from Q1 and 60% compared with the same period last year.
In total, lenders issued just under $808 billion worth of mortgages in Q2. That was down quarterly by 11% and annually by 35%. As with the number of loans, it was the biggest annual decrease in the dollar volume of loans in eight years.
Meanwhile, purchase loan activity increased slightly by 8% to 1.1 billion, representing 46% of all borrowing and reflecting the seasonal upswing of the Spring home-buying season, the report noted.
However, the report stressed that the gain was “unusually small for the months running from April through June” as it represented an annual drop of 21%.
The dollar volume of loans taken out to buy residential properties rose to $431.4 billion which, although up 15% from Q1, was also down 12% compared with the second quarter of last year.
The report highlighted home-equity lending as the best-performing category by far during the second quarter, with Home Equity Lines of Credit (HELOC) jumping 35% quarterly and 44% annually to 341,704.
The largest increases in HELOC mortgage originations in metro areas with a population of at least one million were in Fresno, California (up 82.9%); Riverside, CA (up 80.9%); and Buffalo, New York (up 53.2%).
Regarding this aspect, Sharga said: “Borrowers looking to tap into their equity should know that HELOC activity has been particularly strong among credit unions and community banks, along with a small but growing number of depository banks.”
However, he added that non-bank mortgage lenders were not likely to be active participants in the HELOC market, even though they had started “to more aggressively originate home equity loans”.
In other developments, mortgages backed by the Federal Housing Administration (FHA) increased as a portion of all lending for the third straight quarter, accounting for 10.7% of all residential property loans originated in Q2, while residential loans backed by the US Department of Veterans Affairs (VA) accounted for 5.1% of the total for the same period - down from 5.6% in the previous quarter and 6.8% annually.
The report concluded that the latest loan trends “reflected a housing market in flux, pushed by competing forces, and continued a sharp break from a period when lending activity nearly tripled from early 2019 through early 2021”.
New home sales plummet to level not seen in more than six years.
Sales of newly built, single-family homes hit a six-year low in July as the housing market cooled in reaction to rising mortgage rates, deterring prospective buyers.
New home sales tumbled 12.6% to a 511,000 seasonally adjusted annual rate, below the downwardly revised June reading of 585,000, according to newly released data by the Census Bureau. Compared to July 2021, sales were down 29.6%.
“The disappointing sales pace mirrors an ongoing decline in builder sentiment as elevated mortgage rates and higher construction costs are pushing more consumers out of the market, particularly entry-level buyers,” said Jerry Konter, chairman of the National Association of Home Builders (NAHB).
“The sharp drop in new home sales is another clear indicator that housing is in a recession,” added Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis. “The combination of higher prices and increased interest rates are generating a notable slowing of the housing market.”
The median sales price of new houses sold in July was $439,400, and the average sales price was $546,800. On the bright side, new single-family home inventory remained elevated at a 10.9 months’ supply, up 81.7% year over year. At the end of July, the seasonally‐adjusted estimate of new houses for sale was 464,000. However, only 45,000 of the new home inventory is completed and ready to occupy. The remaining have not started construction or are currently under construction.
“For those who are still motivated to buy, the market has become a less competitive space, and buyers are not facing the bidding wars that characterized much of the earlier phases of the pandemic,” said Kelly Mangold, principal at RCLCO Real Estate Consulting. “However, underlying demand for for-sale new homes remains, and any adjustment is likely to be far less severe than what was experienced in 2008 because the for-sale market is still undersupplied compared to new household formation.”
Prospective buyers continue to delay decisions due to still-high home prices and interest rates.
Home buyers continue to play the waiting game as mortgage applications for new home purchases fell 16.1% in July due to high-interest rates and other economic headwinds.
According to the Mortgage Bankers Association, home purchase applications tumbled 16.1% year over year. That’s compared to June, when applications dropped by 7%.
“Mortgage applications to purchase newly built homes weakened in July, as prospective homebuyers continue to delay decisions because of economic uncertainty and still-high home prices and mortgage rates,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “The slide in purchase applications for new homes – now down for the fourth consecutive month and 16% lower than a year ago – is consistent with data on declining homebuilder sentiment and slowing permitting activity for new construction.”
MBA’s estimate of new home sales, a reliable leading indicator, was also lower in July at a seasonally adjusted annual rate of 591,000 units – the slowest since April 2020. The July estimate is a decrease of 2.6% from the revised June pace of 607,000 units. Unadjusted, there were approximately 50,000 new home sales in July, down 10.7% from the revised 56,000 new home sales in June.
By product type, conventional loans composed 70.7% of loan applications, FHA loans composed 17.7%, RHS/USDA loans composed 0.2% and VA loans composed 11.4%. The average loan size of new homes decreased from $423,221 in June to $416,029 in July.
Fannie Mae’s Economic and Strategic Research (ESR) Group expects total home sales to tumble 16.2% in 2022, as recent data hints at a faster slowdown in near-term sales than previously expected. The latest forecast also projects total mortgage origination activity to fall to $2.47 trillion in 2022 from $4.47 trillion in 2021, and then a further reduced $2.29 trillion in 2023.
“Housing remains clearly on the downtrend – and has been for several months now – due to the combined effects of outsized home price increases and the significant and rapid run-up in mortgage rates,” Fannie Mae chief economist Doug Duncan said. “The question for many market observers is how quickly, and with how much additional tightening, the core inflation rate will come down to the Fed’s preferred target. In our view, the labor market’s continued strength suggests that the Fed is likely to maintain its aggressive posture through the end of the year.”
"We're witnessing a housing recession in terms of declining home sales and home building".
Existing-home sales retreated for the sixth straight month as buyers put their house hunting on pause due to high-interest rates.
According to the National Association of Realtors, existing-home sales fell to a seasonally adjusted rate of 4.81 million, down 5.9% from June and 20.2% from a year ago. Year-over-year, sales fell 20.2% from 6.03 million in July 2021.
“We’re witnessing a housing recession in terms of declining home sales and home building,” said NAR chief economist Lawrence Yun. “However, it’s not a recession in home prices. Inventory remains tight, and prices continue to rise nationally with nearly 40% of homes still commanding the full list price.”
The median existing-home sales price rose 10.8% year over year to $403,800, $10,000 lower than the June peak of $413,800. Total housing inventory at the end of July was 1.31 million units, a 4.8% boost from June and unchanged from the previous year. The inventory of unsold existing homes grew to 1.31 million, or the equivalent of 3.3 months at the current monthly sales pace.
The downturn in sales also reflects the impact of the mortgage rate peak of 6% in early June, according to Yun. The commitment rate for the 30-year mortgage stood at 5.41% in July, down from 5.52% the week prior. That’s compared to the 2.96% average commitment rate across all of 2021.
“Home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers,” he said.