Economic Commentary

Home sales still limited on the supply side: Weekly Economic Review & Outlook

June 30, 2023
A house being built by construction workers.

Last week’s housing data showed that demand for new homes remains solid despite headwinds from higher mortgage rates, while the market for existing homes is stuck in neutral. As most home sales are existing homes, overall sales activity is unlikely to pick up substantial momentum until mortgage rates come down from their current lofty perch and inventory rises.



Key Takeaways:

What we learned last week: (pg. 1)

Existing home sales stuck in neutral

Existing home sales have stabilized but remain low from a historical perspective.

May was a big month for housing starts

Housing starts surged in May to the highest level in more than a year.

What we’re watching this week: (pg. 2)

June 27: New Home Sales

Housing start surge should fuel new home sales

Single-family housing starts rose 18.5 percent in May to an 11-month high, suggesting that demand for new homes remains solid despite higher borrowing costs, although builders are offering reduced financing rates to incentivize buyers. According to the NAHB Housing Market Index, builders have a positive outlook for the housing market, although their changes in attitudes reflect changes in home sales activity, rather than lead. Applications to build, an indicator for future construction, rose 5.2 percent, while permits for single-family homes also increased. New home sales should improve 2.5 percent in May to an annualized pace of 700,000 as builders provide the housing market with increased new home inventory.

June 27: Consumer Confidence

Consumer confidence should remain resilient

U.S. consumers continue to see robust job opportunities and higher pay, supporting household spending power. While labor conditions are expected to ease in coming months, households are still enjoying a solid income boost from the healthy job market. Consumer confidence should rise to 104.0 in June as views on current economic conditions remain buoyant. But respondents should remain highly concerned about future growth with strong expectations of a recession on the horizon.

June 30: Personal Income & Personal Spending

Personal income and spending fueled by wage growth

The U.S. economy has remained sturdy this year through banking-sector shocks, the debt ceiling controversy, and continued rate increases from the Fed. While elevated inflation has been the primary strain for households and the Fed alike, consumers have repeatedly surpassed spending expectations due to the strength of the labor market. May’s personal income and spending releases should be similar, with solid wage growth supporting broad household spending, especially on services. We forecast personal income and spending to rise 0.3 and 0.2 percent, respectively, in May.

Analysis: Little change for existing home sales in May

Existing home sales edged slightly higher in May to an annual rate of 4.30 million units — improved from the recent trough seen in January, but still historically low. The lack of movement in existing home sales suggests that most homeowners are reticent to list in the current rate environment while homebuyers are feeling the crunch from higher potential mortgage payments and lack of homes on the market.

The housing affordability index fell to a five-month low in April (when most of May’s sales would have gone into contract). Additionally, the number of existing homes for sale fell to its third-lowest monthly reading ever on a seasonally adjusted basis. The supply side of the market is suffering because homeowners are reluctant to put their houses on the market and forfeit their current mortgages, many of which were locked in near all-time low rates over the past few years.

The pace of existing home sales is expected to remain subdued in the near term as supply concerns likely won’t abate anytime soon. This should continue to lift demand for new homes, as evidenced by the sixth straight increase in the NAHB housing market index (HMI) through June and the surge in housing starts in May. The HMI’s component index for current sales has increased every month this year, while the homebuyer activity measure (traffic of prospective homebuyers) matched a 12-month high in June. Still, even a strong number for new home sales this week (see forecast commentary on page two) won’t meaningfully pull housing out of its recent slump as existing homes are the far larger portion of the housing market.

Analysis: Home construction surges

Residential construction roared back in May, at least for one month. Housing starts climbed 21.7 percent to an annual rate of 1.63 million units; it was the largest monthly increase in starts since October 2016.

Even after some likely revisions, builders got a head start on the summer sales season in anticipation of improved demand for both single-family homes and apartments. There is typically noise in the housing starts data, especially for multifamily starts which climbed to their fastest annualized pace since 1986. That said the strong rebound in home building aligns with the abovementioned home builder survey data and is consistent with more prospective homebuyers shifting to new homes due to the ongoing shortage of existing inventory.

May’s surge in housing starts could imply some further momentum for home construction over the summer. Permits for construction, a leading economic indicator, rose in May, suggesting that many builders aren’t done yet. Still, there continues to be interest rate and price headwinds for home purchases. And when layering in a likely recession later this year, the housing market is not likely to gain any lasting footing until 2024 when lower mortgage rates should prompt renewed sales activity.

On the interest rate front, Chairman Powell in his semi-annual testimony to Congress repeated the hawkish guidance he provided at his post FOMC meeting press conference. He defended the FOMC’s decision to “skip” a rate hike last week, arguing that since the Fed is closer to its terminal rate for the cycle, it can continue to slow down the pace of rate hikes but is likely not done tightening. Indeed, he emphasized that most officials see two more rate hikes coming later this year – which he personally endorsed as likely the right amount given the estimates for economic growth and inflation. He said that while the macro-economic conditions are in place for further cooling in inflation, it will take time to significantly slow the rate of price increases.


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