Steady As She Goes – Real Estate Market Update

There are two broad things that economic analysts and traders tend to pay attention to that rely on two vastly different skill sets. One thing they look at is data, going over everything from housing starts to retail sales to gross domestic product. The other is parsing language for hidden meaning.

The latter often involves teasing out every word that might mean something in any statement made by Federal Reserve officials. That’s been the focus of the last few days.

The last several increases in the benchmark for the federal funds rate have been 75 basis points each. The idea here has been to encourage tighter borrowing conditions so that people aren’t spending as much money to slow down the pace of inflation. If money is harder to get, people will hold onto it. There’s some evidence that this is working.

The Fed’s preferred data point for measuring inflation is the portion of the personal consumption expenditures (PCE) that excludes food and energy. In data for October, the numbers showed that prices increased 5% for this index over the last 12 months. While this is more than double what the Fed would like to see, it was 7% in June.

At the same time, the Fed is performing a delicate balancing act. Raising rates too high too fast could cause the economy to slip into a recession. It’s with this backdrop that traders were very closely watching a speech given late last week by Fed Chairman Jerome Powell.

Specifically, there were a few sentences at the very end that drew particular attention. He talks about potentially moderating the pace of rate increases as soon as December. Many market participants have long anticipated a lower 50-basis point increase to end the year.

Once they’ve gone with lower increases, other lines of the speech seemed to say that the Federal Reserve isn’t as concerned with how much it needs to increase rates each time as it is with how long it needs to continue doing so. In other words, officials might go with lower increases over a longer period. Slow and steady.

For your clients, this might mean mortgage rates begin to moderate. Additionally, they may find that home prices are coming down a bit. The combination of these things should help buyers. However, if they’re ready and see a rate they like, encourage them to lock. No one knows what will happen in the future.

As always, this portion of the report is compiled with the help of analysis provided by our friends at Econoday.¹

Consumer Price Index (CPI)

This index is compiled by the Bureau of Labor Statistics. While not the Fed’s preferred inflation measure – the PCE is put together by the Bureau of Economic Analysis – this one does break out shelter quite nicely.

Taking a brief look at the top line numbers, overall inflation was up 0.4% in October and 7.7% for the year. When food and energy were taken out, prices were up 0.3% for the month and 6.3% for the last 12 months.

Turning specifically to shelter, prices were up 0.8%, although this is skewed by a 4.9% increase in the cost of lodging away from home. Rent and owners’ equivalent rent were up 0.7% and 0.6%, respectively. The overall shelter index is up 6.9% since last October.

Retail Sales

Overall retail sales were up 1.3%. It was the same number when vehicles were taken out and they rose 0.9% when taking out both vehicles and gas.

Looking at numbers more associated with housing, sales at furniture and home furnishings stores were down 0.8% in October, but they’ve gone up 1.6% compared to the same time a year ago. Meanwhile, sales at building and home and garden stores were up about 1.1% in October and 7.6% vs. last year.

Housing Market Index

This tracks home builder sentiment, and the effect of higher rates is definitely being seen. The index is contracting more rapidly, falling to 33 from 38 in October.

Current sales were down 6 points at 39. Expected sales over the next 6 months were down 4 points at 31. Meanwhile, traffic of prospective buyers going through homes fell 5 points to 20.

New Residential Construction

With the availability challenges in inventory, the biggest immediate impact comes from homes that are just completed. In this area, the number of units fell 6.4% in October to a seasonally adjusted annual rate of 1.339 million. This is still 6.6% higher than a year ago. Single-family completions were down 8.3% at 961,000. Meanwhile, completions in buildings with 5 or more units came in at 362,000.

Turning to starts, these were down 4.2% at 1.425 million in October, 8.8% below the same time a year ago. Single-family starts fell 6.1% to 911,000, going along with 556,000 multifamily units.

Finally getting to permits, these fell 2.4% in October to 1.526 million on an annual basis. That’s 10.1% lower than the same time a year ago. Single-family permits were down 3.6% at 870,000, while there were 633,000 multifamily permits.

Existing Home Sales

Existing home sales came in at a seasonally adjusted annual rate of 4.43 million in October, down 5.9%. They’re down 28.4% compared to the same time last year.

Breaking it down further, sales of single-family homes are down 6.4% at 3.95 million, having fallen 28.2% for the year. Sales of homes with 5 units or more are down 2% for the month and 30.4% since last October.

The price of an existing home is up 6.6% from last year, but it fell 1.1% in October, settling at $383,500. Inventory remains tight. All the supply in the market would run out within 3.1 months at the current pace of sales.

New Home Sales

Sales of new homes were actually up 7.5% in October to come in at 632,000, down 5.8% compared to a year ago. The differing numbers may be due to a peculiarity in the lending market for new construction. When a home is being built, you can often lock down your rate much earlier, so people may still have been taking advantage of that.

Supply of new homes on the market was at 8.9 months given the current pace of sales in October. Meanwhile, the median price of a new home was up 8.2% for the month at 493,000. This has gone up 15.4% since last year.

Case-Shiller Home Price Index

This is a 3-month rolling average of home prices across 20 major metropolitan cities. On a seasonally adjusted basis, they were down 1.2% in September. For the month, they fell 1.5% without the adjustment, but they’ve gone up 10.4% on the year.

This is the first major index to show a nationwide drop in home prices. Because this is a rolling average, they may still have further to fall as well. The data for September would still include July, which is a prime month for home marketing, but the market usually cools naturally at the end of the year.

FHFA House Price Index

Unlike Case-Shiller, the FHFA index showed a 0.1% increase in home prices in September. There could be several reasons for this. First, this index only looks at transactions backed by conventional loans. Second, it’s not a rolling average. Third, there’s some difference in the way the two indexes handle seasonal adjustment.

Home prices were up 11% on the year in this reading.

Consumer Confidence

Consumer confidence came in down 2 points at 100.2 in November. Of interest to real estate agents, the intention to purchase homes and appliances were both down in November.

Gross Domestic Product (GDP)

The good news is the economy grew at a rate of 2.9% in the second estimate for the third quarter. This included a 1.7% bump in consumer spending on an annual basis. The downside is that residential investment saw a 26.8% decline over the same period. Higher mortgage rates are having an effect. This had a drag on GDP to the tune of 1.71%.

Pending Home Sales Index

Representing the number of homes under contract for sale, pending home sales were down 4.6% in October to an index level of 77.1. Because whatever way this report goes tends to be a harbinger for existing home sales, it’s reasonable to expect that those numbers will be lower again come November.

Mortgage rates have been in a downward trend the last couple weeks as there’s been talk of the Fed easing up (however slightly). It’s worth noting that Freddie Mac has made a change to how these numbers are reported. Instead of surveying lenders, it’s going on the basis of the actual mortgages it receives.

As part of this, ARMs are no longer reported and mortgage points don’t factor into this data. With all that in mind, let’s get to the numbers.

The average rate on a 30-year fixed was down 9 basis points at 6.49%, having gone up from 3.11% last year.

For those who prefer a shorter term, the average rate on a 15-year fixed was down 14 basis points at 5.76%. This is up from 3.39% a year ago.

Now that you have this knowledge in hand, use it to give your home buyers insight and advantage as they navigate the market. Have a great month!

¹ Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2022 Econoday, Inc. All rights reserved.