Is That a Light We See at the End of the Tunnel?

Article originally posted on CoStar on September 4, 2024

Housing Market Prospects Pick Up

After a dismal spring and early-summer selling season, housing sales increased in July for the first time in five months.

According to the National Association of Realtors, existing home sales rose 1.3% in July to 3.95 million units at a seasonally adjusted annual rate but are 26% below their five-year pre-pandemic average.

Meanwhile, the U.S. Census Bureau reported that sales of new homes surged in July by 10.6%, its largest percentage increase in two years, reaching 739,000 units, the highest number in more than a year. These are up by 24% over their pre-pandemic average as builders continue to lure buyers with incentives such as mortgage rate buydowns and price discounts, shifting market share in their favor.

The boost in sales came as the average rate on a conventional 30-year fixed mortgage loan eased recently, falling below 7% in mid-May and slipping further to 6.7% by the end of July, according to Freddie Mac.

Sales could also have been facilitated by more homes being offered for sale in July.

According to NAR, inventories reached 1.33 million in the month, their highest level since October 2020 and the seventh-consecutive month of improvement. Rock-bottom mortgage rates during the pandemic had homeowners refinancing their existing home loans, which kept them from offering their homes for sale in exchange for a higher rate loan on a new residence. But that lock-in effect is likely to diminish as mortgage rates fall.

According to the S&P CoreLogic Case-Shiller Price Index, home prices rose 5.4% in June over the prior year, a deceleration from the annual gains in the past three months. They are now returning to the average pace of the 2015-18 period.

After seeing gains of between 10% and 20% from late 2020 through late 2022, this is a relief to many homebuyers, who were so priced out of the market last spring that home prices fell.

As mortgage rates fall below 6.5%, pending home sales, or contracts to purchase homes, could rise in August. The Federal Reserve is preparing to cut rates at its next meeting in September, and homebuyers will likely wait another month or two before committing to a purchase contract to see if rates ease further. However, with rate cuts almost baked in, rising home inventories and slowing price growth, the moribund housing market may find some life soon.

At an annual symposium to discuss economic research in Jackson Hole, Wyoming, last week, Federal Reserve Chair Jerome Powell stated, “The time has come for policy to adjust,” signaling the Fed’s plans to begin cutting rates for the first time in a while. Powell explained the shift by citing weakening labor markets and confidence that inflation is moving sustainably to its 2% target.

Markets expect a rate cut at the Fed’s September meeting but are divided over whether the committee will shave 25 or 50 basis points off its target rate.

Powell deferred on offering guidance on that question, but recent revisions to job data revealed that the government had overestimated gains by 818,000 over the last year, the largest annual revision since 2009.

The new estimates provided strong evidence of a weakening labor market, bringing the average monthly jobs gains to 173,500 rather than the 242,000 in previous estimates. Still, the downward revision represents only a 0.5% shrink. In a labor market comprised of 157 million jobs, this seems like little reason for panic.