For the housing market, however, rising interest rates, lack of inventory and high prices have definitely conspired to slow sales for both new and existing homes.
U.S. GDP growth, which averaged 2.3 percent in 2017, surged
to 4.2 percent by the second quarter of 2018, slipping to a still-strong
advance estimate of 3.5 percent during the third quarter. Notably, it was increasing consumer spending
during the third quarter which made up for a slowdown in business investment. Still,
current forecasts are suggesting this rate of growth to fall below 3.0 percent
during the final quarter of the year.
Not surprisingly, as of the end of September, the number of unfilled jobs was nearly 18 percent higher than the number of officially unemployed persons, which is the primary reason we’re starting to see more wage inflation of close to 3.0 percent per year.
Speaking of inflation, the Federal Reserve has been keeping
it mostly in check so far in 2018 with three rate hikes, and a fourth planned
for December. However, given that the
Producer Price Index – which tracks wholesale input prices – jumped by 0.6
percent in October (or three times what was forecast), the odds for that fourth
rate hike have certainly increased.
Still,
the Consumer Price Index remains fairly tame, rising by 2.3 percent
year-on-year through September versus 2.1 percent in 2017. Moreover, the annual increase in the
Fed-preferred PCE Price Index has been trending lower since the summer months, falling
to 2.0 percent by September.
Consumer confidence has also helped prop up the economy in
2018, with the University of Michigan’s widely watched sentiment index
remaining at its highest year-to-date level since 2000. Even stock market volatility, inflation and
polarized politics have done little to dent consumer confidence, with consumers
feeling flush enough to tap their savings or borrow money to fund their
purchases.
Nonetheless, a booming economy with rising inflation and
home prices often takes an eventual toll on the housing market. Although builder confidence remained strong
at 68 in October, building permits took a breather in September, slipping
slightly from both the previous month and the same month of 2017. September housing starts also dipped moderately
from August, but were up 3.7 percent year-on-year.
In its own survey, the Mortgage Bankers Association showed September new home mortgage applications up 8.2 percent year-over-year, and year-to-date sales for 2018 were still up 3.1 percent versus 2017.
For existing homes, a combination of low inventory for
starter homes and higher interest rates helped drive down September sales down
4.1 percent year-on-year, for the lowest annual sales rate since November
2015.
Unsold inventory rose slightly to a 4.4-month
supply, up from 4.2 months a year ago, while the median sales price rose 4.2
percent, for the 79th straight month of year-on-year gains. Although September pending home sales did
rise slightly from August, they were still down 1.0 percent year-on-year, and
have fallen on an annual basis for nine consecutive months.
Another indicator of affordability, the NAHB/Wells Fargo Housing Opportunity Index, fell to 56.4 percent in the third quarter of 2018, for the lowest rate since the same quarter of 2008, and down sharply from the last peak of 77.5 in 1Q 2012. Consequently, in the months ahead, look for more affordable supply and rising wages to counteract higher interest rates in order to keep the housing market humming.
