Market Update

August 28, 2023 - Rates have risen sharply in the past few weeks, but the housing market has weathered this rise relatively well. Although the primary measures of mortgage demand show that homebuyers remain affected by higher rates, the gap between 2022 and 2023 levels has yet to widen noticeably. In addition, rates have begun to inch down slightly since the gathering of economists in Jackson Hole last week where the Federal Reserve Chairman seemed more cautious about raising rates at the upcoming FOMC meeting in September. Despite this optimistic news for financial markets, consumers remain a primary area of risk for the macroeconomy as delinquencies on various forms of debt have begun to rise, taking some steam out of our primary engine of growth thus far. While many have begun to celebrate the possible achievement of the proverbial ‘soft landing,’ the leading economic index suggests that we may not be out of the woods quite yet.

Rates inch down from 20+ year highs: After rising to almost 7.5% in the previous few weeks, daily tracking shows that mortgage rates have come down roughly 10 basis points since the Chairman of the Federal Reserve spoke in Jackson Hole where he indicated that the committee will take a data driven approach and be flexible in the months ahead. Some interpreted these comments to mean that another rate hike in September may not be in the cards. Since then, 2-year Treasury rates have inched down slightly, although 10-year notes have come down far less. This means that the yield curve, a reliable correlate with future recessions, remains inverted and suggests that we may still face headwinds next year. However, it also suggests that rates could begin to dip again if 10-year rates start to follow shorter-term yields down.

Shrinking money supply could help with inflation: Although the economy is not yet fully out of the woods on its battle to reign in inflation, recent data from the Federal Reserve shows that M2, a primary indicator of liquid money supply currently in circulation, has now been dropping for the past 8 months consecutively as the FOMC tightens monetary policy and raised its benchmark interest rate. This should have the effect of curtailing some demand for products and services and helping to alleviate the shortage of workers currently needed to fill open positions, which, in turn, would help to reduce upward pressure on inflation in the months ahead.

Credit card and auto loan delinquency rates are on the upswing: As credit card balances rose above $1 trillion for the first time in the second quarter in the U.S., more Americans are falling behind on their payments. According to data from the New York Fed, new credit card delinquency rate hit 7.2% in Q223, while the rate of new auto loan delinquencies reached 7.3% in the same time period. Both rates surpassed pre-pandemic levels in the latest quarter. With student loan payment set to restart in October, consumers could be stretched even thinner financially in coming months, and a slow down in retail spending in the last quarter of this year should be expected.

Rent growth continues to slow: U.S. single-family rent growth continued to rise but at a more moderate pace. The latest Single-Family Rent Index released by CoreLogic shows that rent growth eased for the 14th consecutive month in June and registered a year-over-year gain of 3.3%. The increase was the lowest since autumn 2020. The monthly growth rate of 1.1% recorded in June was consistent with the pre-pandemic average of 1%, which could be an indication that the measure is returning back to its long-term normal. Chicago had the highest annual increase in single-family rent growth in June at 6.6%, while Los Angeles/Long Beach/Glendale posted a 2.7% and San Diego/Carlsbad recorded a 4.3%.

Mortgage demand peaks in 2023 at half 2022 levels: Although mortgage demand saw its typical bounce during the spring homebuying season, the monthly index of new purchase applications peaked at roughly 200 in May of this year compared with a peak of roughly 300 last year. This is consistent with the volume of sales transactions, although California bounced back to slightly more than half of the roughly 510,000 units that it hit at the end of 2021. The effect of rising interest rates has sidelined some potential buyers as the effects of rising prices have compounded the reduced purchasing power.

Existing home sales fall, while new home sales rise and capture additional market share: As noted in previous editions of this report, new home sales have been steadily gaining market share as existing homes suffer from a lack of inventory that has prevented transactions from rising. Nationwide, resale transactions fell to 4.1 million units on an annualized basis last month, which is a 2.2% decline from June. At the same time, new home sales rose 4.4% bringing the share of new to all single-family homes sold to nearly 16%. Builders have been increasingly relying on incentives like rate buy-downs and a relatively less depressed stock of new home inventory to achieve gains in the level and share of homes sold as existing homeowners remain reluctant to sell their properties and abandon their historically-low interest rates. Even in California, where existing inventory is up slightly for July, the current unsold inventory index remains at 2.5 months of supply, which means that without any new inventory, California will be out of homes to sell before we enter winter.