Raising the Roof

The U.S. housing market was a hot topic at last week's post-Federal Reserve meeting press conference, with chairman Jerome Powell expressing his belief that a "correction" in prices would be a necessary part of the Fed's inflation fight. 

“What we need is supply and demand to get better aligned, so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again," Powell said after the Federal Open Market Committee meeting last Wednesday.

Interest rate-sensitive sectors like housing have indeed been among the first areas of the real economy impacted by the past six months of monetary policy tightening. The average rate on a 30-year fixed-rate mortgage has more than doubled this year, to 6.29% as of last week, according to data from Freddie Mac. That's the highest rate since 2008.

The higher rates can mean a difference of several hundred dollars a month in additional mortgage payments for some borrowers. The sharp increase in mortgage rates is starting to have an effect on prices and sales, but not in an orderly fashion.

Government data on new-home sales in August released this morning came in surprisingly high, at a seasonally adjusted annual rate  of 685,000. Economists had been expecting 495,000 sales, on average. That's a big beat, but still way down from the peak rates of more than a million new home sales in summer 2020, and more than 800,000 last summer.

Existing-home sales data for August came out last week, and that showed a seventh-straight monthly decline to a seasonally adjusted annual rate of 4.80 million homes.

On the affordability side, prices are still soaring. S&P CoreLogic's Case-Shiller National Home Price Index for July—also released this morning—showed average prices nationally up 15.8% from a year earlier. But that was down from June’s 18.1% annual gain. The 2.3 percentage point decrease in the rate was the largest month-over-month deceleration in the history of the index.

Overall, the data are messy and paint a mixed picture. But it certainly feels different in the housing market today than at the start of the year, and the longer mortgage rates remain high, the more the market should decelerate.

Buyers and sellers alike seem to be souring on the environment. Here's a pertinent anecdote from Barron's Shaina Mishkin:

For Hazel Shakur, a Redfin real estate agent working in the suburbs of Washington, D.C., the end of summer normally means a pickup in consultation requests from prospective sellers looking to list before traffic slows down in the winter.

But not this year. “I polled other listing agents in my area, and sure enough, we went into this weekend with no appointments,” Shakur said. “A lot of sellers are very reluctant about selling their house.”

Buyers, too, are pulling the brake as home prices soften. “No one wants to be the person who buys the house for too much,” Shakur said.

Read much more from Shaina on why 7% mortgage rates could be just ahead, and what that would mean for both home buyers and sellers.