KEY DATA: Sales: -5.5%/ FHFA Prices (Monthly): +0.3%; Over-Year: +6.1%
IN A NUTSHELL: “And the downbeat goes on, and the downbeat goes on.”
WHAT IT MEANS: Another set of housing numbers, another set of soft housing numbers. New home sales fell sharply in September and it wasn’t simply a matter of weather. Yes, demand tailed off in the South, but there were much bigger drops in the Northeast and the West. Home prices have been soaring in parts of the West and the elevated costs, coupled with higher mortgage rates, may be taking their toll on the ability to move new houses. Conditions would have been worse if it hadn’t been for strong sales in the Midwest. It looks like higher priced units are suffering the greatest decline. Sales of new homes above $500,000 fell, while the share of purchases in the middle range, between $200,000 and $500,000 increased. Indeed, the share hit its highest level since the data were first released in 2002. That is good news as it looks like middle-income households are still buying new properties.
Housing prices rose moderately in August. Still, the increase over the year in the Federal Housing Finance Agency’s index, which uses prices on mortgages sold to Freddie Mac and Fanny Mae, continues to decelerate. The gain remained above 6%, which is nothing to sneeze at. Prices are still soaring in the West, but with demand moderating, those increases should fade and the national slowdown in housing price inflation should continue.
MARKETS AND FED POLICY IMPLICATIONS: Are we headed for another housing market collapse? I don’t see that happening. First, and most critically, the market never did reach the bubble stage, at least as far as sales are concerned. In the new home market, sales peaked at about half of the high posted in 2005. Existing home demand peaked at about 20% below the highs set during the bubble. The problem is that demand has not been evenly distributed across the nation and prices have soared in some areas. Are there price bubbles in some of the major cities in the West? Undoubtedly, but we have gone through regional price bubbles in the past and come out the other side reasonably rapidly. It was when demand got totally out of hand and people were buying home with little equity and less financial capacity that the problems arose. Still, housing did add to growth for the last six years. It is likely that will not be the case this year. That is a reason I, and most other economists, think that the expansion should moderate going forward. As for the Fed, clearly, the members just don’t get it. We need zero interest rates. If it was good enough for the Obama economy, it should be good enough for the Trump economy. Of course, Obama had to deal with a housing market collapse, a meltdown in the world financial system, massive layoffs, deteriorating world growth and the steepest recession since the great depression, but hey, who’s counting? The president’s comment about zero interest rates probably gave even those at the Fed who might have been concerned about political pressure a reason to discount the president’s attacks. When faced with a choice between an economy that is collapsing but has zero rates and one that is growing strongly with rates rising, I think the Fed members will take the rising rate/strong growth economy every time. So don’t expect anything but another rate hike in December.