Financial News Highlights
- June’s housing data showed another decline in activity as the effects of higher mortgage rates and stretched affordability impact the market.
- A strong labor market and tight inventories will support housing construction and limit the downside risks.
- Despite the slowdown in the housing market the Fed will keep up its fight against inflation with another 75-basis point hike next week.
U.S.-Softening Housing Market Won’t Deter Fed
This week’s housing data showed that the market continued to slow meaningfully through June in financial news. Yet, as inflation continues to linger at multi-decade highs the Fed will keep up the fight against rising prices by raising rates another 75-basis points (bps) next week. Fortunately for the housing market a strong labor market and tight inventories will support construction and limit the possibility of a rapid deterioration of conditions.
On Tuesday the Census Bureau released June data on national housing starts. Overall, starts pulled back 32k units to 1,559k (annualized) in June, touching their lowest reading since last September. However, the entirety of the decline was attributable to weakness in the single-detached segment (-86k) as multifamily construction rose another 54k. The multifamily starts registered 577k units, and apart from April’s 632k and January 2020’s 601k, this is the strongest reading since the late 1980s. Permitting activity pulled back as well, falling 10k to 1,685k (annualized). Again, the multifamily segment showed ongoing strength, with permits rising 74k, while the single-family segment pulled back 84k.
Looking forward, there still looks to be healthy support for construction in the coming months. The pipeline of projects (as measured by units authorized but not started), is at a multi-decade high with a near even split between multi-unit and single-family structures waiting to get shovels in the ground (Chart 1) in further financial news. As raw materials prices come down, and supply chain issues gradually fade, the opportunity for more projects to get underway increases.
Indeed, more construction will be needed as this week’s existing home sales data showed there was roughly 3.0 months’ worth of inventory in the market – still below what is a balanced market. That said, amid falling affordability sales are slowing markedly. June’s existing home sales data reflect just that as sales fell to 5.1 million units (annualized) – the lowest reading since June 2020 (Chart 2). The slowdown in sales activity helped push the seasonally adjusted median sales price down 0.2% on a month-over-month basis. However, affordability continues to be stretched, particularly for the single-family segment. Combined with elevated mortgage rates this should continue to cool housing sales in the coming months.
Given the exuberance in the housing market over the past two years, the Fed’s mandate to fight inflation, and the strains on affordability, the slowdown in the housing market was expected. Indeed, residential investment is likely to contract well into 2023. That said, the moderation is simply helping bring the economy back to a pre-pandemic composition.
Despite the slowdown in the housing market the Fed will keep up its fight against inflation with another 75-basis point hike next week. The unemployment rate is still holding at 3.6%, while last week’s CPI print showed inflation hit 9% year-over-year in June. A strong labor market and inflation far from target means policymakers will continue working hard to keep inflation expectations anchored and bring down the pace of price gains.
Andrew Hencic, Senior Economist | 416-944-5307
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