Unsettled Foundations of the Housing Market
Chief Economist Eugenio J. Alemán discusses current economic conditions.
Mortgage rates are the highest they’ve been in over 30 years, keeping home affordability in unprecedented territory. However, mortgage rates above 7% aren’t the only factor keeping home prices high. In fact, the low supply of homes is currently the largest contributor to high prices. This is because 61% of outstanding mortgages have a rate of less than 4%, while 90% of mortgages are lower than 6%. Therefore, homeowners who have locked in mortgages lower than today’s rates (whether through purchase or refinancing) are unlikely to put their homes for sale, especially considering the new possibilities given to workers for working from home. The combination of these factors has brought affordability to unprecedented territory, where it may take prospective buyers nearly a decade to save up for a 10% down payment according to a study by Zillow.
The supply of existing homes has improved over the last 12 months but remains at historically low levels. However, the supply of existing homes is unlikely to increase as owners hold onto their comparatively low mortgages, forcing potential homebuyers to consider new constructions. However, while housing data tends to lag by a few months, more timely indicators such as weekly data published by Zillow suggests that despite some recent strength likely due to seasonality, listings of homes for sale continue to decline.
The solution seems obvious, build more homes! In fact, we estimate that the U.S. needs an additional 3.5 million homes to address the current housing shortage. However, building permits and housing starts aren’t suggesting that we’ll see the gap in housing close anytime soon. In fact, this week’s June building permits were 15.3% lower than a year ago, although much of the decline, lately, has been in multifamily starts. Similarly, housing starts in June were lower than expectations, declining 8.0% year-over-year. Despite significant differences among regions, the bottom line remains that at the current rates, the housing shortage is unlikely to be filled. Additionally, despite the NAHB Housing Market Index’s further improvement in July, homebuilder sentiment is still being negatively impacted by high mortgage rates, as well as elevated construction costs and supply-side challenges.
What if mortgage rates decline? A decline in mortgage rates will likely be met with a surge in the number of consumers wanting to buy homes, which would ultimately put further upward pressure on the price of homes. We had a taste of this during the first quarter of the year as mortgage rates came down and the housing market started to stabilize after several years in recession.
At this time, there is very little that could bring the housing market into equilibrium in the short to medium term, as it takes a long time for investment in the housing market to shift the supply curve of housing to the right, i.e., increasing the supply of new homes. For now, it seems that the only alternative is for home prices to continue to increase to a point that will produce strong incentives for an increase in new home construction.
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currency investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted with a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.
The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.
The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.
Import Price Index: The import price index measures price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.
ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weight to new orders, production, employment, supplier deliveries, and inventories.
ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) Report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.
Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of the output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of the gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.
The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measure the value of residential real estate in 20 major U.S. metropolitan.
Source: FactSet, data as of 7/7/2023
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