Housing Market 'In Much Worse Shape' Than Fed Wants to Admit: Economist

(Yahoo!Finance) - The U.S. housing market is under pressure.

Data this week on new home sales and pending home sales reflected sharp drops from last year and showed the impact higher interest rates continue to have on prospective buyers.

On Wednesday, the latest report on pending home sales from the National Association of Realtors showed contracts to buy previously owned homes fell 1% from June to July and 19.9% from July 2021 to July 2022.

The Pending Home Sales Index — a measure of signed contracts on existing homes — dropped to 89.8 last month, the lowest since the start of the pandemic. Contracts declined for the eighth time in the last nine months, the report said.

On Tuesday, data on new home sales in July showed sales fell 12.6% from the prior month and 29.6% from last year, signaling demand for housing continues to wane as the Federal Reserve continues raising interest rates to slow inflation.

"The housing market is in much worse shape than the Fed has been willing to admit," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note following Tuesday's data. "But policymakers have made it clear that inflation is their primary objective, and housing is collateral damage."

Mortgage rates have leveled out in recent weeks, but the average 30-year fixed mortgage rate is 5.13%, according to Freddie Mac. Earlier this month, rates had dropped below 5% for the first time since April. At the start of 2022, the average 30-year fixed mortgage rate stood at 3.22%.

“The sharp drop in new home sales is another clear indicator that housing is in a recession,” Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis, said in a release on Tuesday. “The combination of higher prices and increased interest rates are generating a notable slowing of the housing market.”

Still, affordability remains challenged, even as higher rates slow activity in the market.

Tuesday's data showed the median price for a new house stood at $439,400 in July, up from $402,400 in June. Data from the National Association of Realtors’ showed the home affordability index, a measure to gauge whether a typical family qualifies for a mortgage, fell to a 33-year low in June.

"In terms of the current housing cycle, we may be at or close to the bottom in contract signings," said NAR Chief Economist Lawrence Yun in a press release on Wednesday. "This month's very modest decline reflects the recent retreat in mortgage rates. Inventories are growing for homes in the upper price ranges, but limited supply at lower price points is hindering transaction activity."

Pricing pressure, however, does look set to be alleviated in the coming months.

"The inverse relationship between new home supply and prices broke down at the start of 2021, as a lack of existing homes pushed buyers into the new home market and sent prices soaring," Shepherdson wrote. "But now existing home supply is rocketing too as homeowners scramble to sell before prices fall too far. This in turn will pressure homebuilders to cut new home prices. We expect sharp month-to-month declines in new home prices for the foreseeable future."

By Dani Romero · Reporter


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