Signs Of A Cool Down – Real Estate Market Update

For the last couple of years, we’ve been living in such a hot housing market that it’s been impossible for some buyers to touch. There are now several signs that the market has cooled, but does that mean your buyers can finally grab the cookies off the sheet?

The Federal Reserve started raising the federal funds rate in March to get control of inflation. There are early indications that this is starting to have an impact on inflation, but one thing that can’t be doubted is the effect that the moves have had on mortgage rates.

Because mortgages are often sold into the secondary market about 60 days after they close, it’s useful to begin looking at interest rates starting in January for a federal funds rate increase anticipated in March. If we go back to the beginning of the year, the average 30-year fixed interest rate according to Freddie Mac is up more than 2.6%.

Higher rates have hit the market pretty hard. A good indicator of what’s happening is how builders are feeling because they take orders and plan the construction around what they think demand will be. They’re surveyed monthly on a 100-point scale, with a number over 50 indicating optimism. In January, the number was 83. In August, it’s 49.

You don’t have to look very far to find the reasoning for the drop in sentiment. Sales of new residential homes have fallen 12.6% in July and their down 29.6% compared to last year at a seasonally adjusted annual rate of 511,000 units. Going back again to January, the annual rate of sales was 831,000.

Taking a brief detour away from new homes and looking at existing home sales, that number has been dropping for 6 straight months to come in at 4.81 million on a seasonally adjusted basis. This has fallen from 6.49 million in January.

Finally, looking at construction, shovels in the ground for new homes being built are way down. They fell 9.6% in July and are down 8.1% for the year at a seasonally adjusted annual rate of 1.446 million.

What does all this mean for your clients? Well, demand is slowing down. In some areas of the country, this is leading to price drops. Moreover, even if prices are slow to move, you may not see the same level of bidding wars we did before. So there are reasons to be encouraged even amidst higher rates.

This portion of the report is supplemented by analysis from our friends at Econoday.¹ Let’s see what else happened.

Housing Market Index

Overall builder sentiment was down 6 points in August to come in at 49 overall. Turning to individual components, the current sales Index was down 7 points at 57. Meanwhile, traffic of prospective buyers going through homes fell 5 points at 32. This may indicate higher rates are turning away buyers. Finally, sales over the next 6 months were down 2 points at 47.

New Residential Construction

Housing completions have the most immediate impact on inventory issues. These were up 1.1% at 1.409 million in July. This is up 3.5% over last year. Meanwhile, on the single-family side, completions were down 0.8% at 1.009 million on a seasonally adjusted annual basis. There were 412,000 multifamily completions.

Turning to starts, these were down 9.6% in July to 1.446 million, down 8.1% compared to the same time a year ago. Single-family starts were down 10.1% at 916,000, while starts in buildings with 5 units or more came in at 514,000.

Finally, authorizations to build future units came in down 1.3% at an annual rate of 1.674 million, 1.1% higher than last year. Single-family authorizations came in down 4.3% at 928,000, while there were 693,000 multifamily permits pulled.

Retail Sales

Retail sales were flat in July. That was up 0.4% when vehicles were excluded and 0.7% when further taking out gas.

In sales levels that are housing adjacent, revenues at building materials and garden supply stores were up 1.5%. Meanwhile, furniture and home furnishings sales rose 0.2%.

Existing Home Sales

Existing home sales came in down 5.9% in July and they have fallen 20.2% since last year. The seasonally adjusted annual rate is 4.81 million. While supply is getting better, it remains on the low side. At the current sales pace, all inventory would be gone within 3.3 months. The median price of a previously owned home did dip 2.4% to $403,800. This is still up 10.8% from last year.

New Home Sales

New home sales settled at 511,000 on an annual basis in July. That’s 29.6% lower than the same time last year. It’s worth noting that the median price of a new home went up 5.9%, as builders focused on more profitable inventory rather than starter homes.

The higher prices certainly aren’t a function of lack of supply. At the current pace of sales, the inventory would last 10.9 months. As a reminder, the market is considered in balance when there is 6 months’ worth of supply. This is the highest level of inventory relative to sales since April 2009.

Pending Home Sales Index

Pending home sales came in down 1% for the month, falling to an index level of 89.8. Homes under contract for sale were down across all four measured regions. As a reminder, this isn’t a good thing for future existing home sales.

Gross Domestic Product (GDP)

The economy shrank by 0.6% in the second reading of the second quarter, but this was better than the 0.9% dip originally thought. Meanwhile, consumer spending did increase by 1.5%.

On the downside, residential investment had a slightly worse quarter than initially presumed.

Case-Shiller Home Price Index

The Case-Shiller index measures prices on a rolling 3-month basis. Prices increased 0.4% in June on both a seasonally adjusted basis and overall. Prices have risen 18.6% on the year. While that’s quite high, it’s down from 20.5% in May.

FHFA House Price Index

Unlike Case-Shiller, this one is not a 3-month average. It also only looks at conventional loans. However, there was a 0.1% increase for the month. In this index, prices are up 16.2% on the year.

Consumer Confidence

August saw a 7.9-point increase in consumer confidence overall. However, of most interest to this audience is that 5.4% of Americans expect to buy a house in the next 6 months. That’s up almost a full percentage point from the last reading.

Consumer Price Index (CPI)

Shelter prices were up 0.7%. That was high compared to the rest of inflation for August, which only showed a 0.1% overall increase and a 0.6% uptick when taking out food and energy. For the year, prices excluding food and energy are up 6.3% and they’ve risen 8.3% overall.

If you’ve got clients who are sitting on the fence, encourage them to lock their rate as soon as possible. Rates just keep going up. If your clients are working with Rocket Mortgage^®, we have some options to help them protect their rate now and refinance with lower costs later.

The average rate on a 30-year fixed with 0.7 points paid in fees was up 23 basis points to 5.89%, which has gone up from 2.88% at the same time a year ago.

Looking at shorter terms, the average rate on a 15-year fixed was 5.16% with 0.8 points paid, up 18 basis points. This is up from 3.19% last year.

The average rate on a 5-year treasury indexed, hybrid adjustable-rate mortgage with 0.4 points paid in fees was 4.64%, an increase of 13 basis points for the week. This has gone up from 2.42% at this time in September of last year.

Now that you know what there is to know, share the news with your clients. 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.