A year ago, the housing market was on a roll.
Existing home sales increased 7% in September from the previous month, reaching an annual pace of 6.29 million. Meanwhile, prices for a median home rose 13.3% from a year earlier.
This week, the real estate market will see a new round of economic data for September and the picture is very different. On Thursday, the Existing Home Sales report is expected to show sales have fallen to 4.7 million annually, a drop of 25%.
Guilty? An aggressive Federal Reserve interest rate program designed to stem inflation has led to mortgage rates of 7%, more than double a year ago.
Other measures of housing activity, including building permits and new construction starts, are expected to show declines of 0.8% and 7%, respectively.
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“Inventory shortages, combined with affordability challenges, continue to affect the housing market,” said Sam Bullard, managing director and senior economist at
Wells Fargo’s corporate and investment banking unit wrote on Sunday. “Home prices are beginning to contract sequentially, a trend that we believe will continue into 2023, with home prices falling around 5.5% across the country.”
Along with soaring gas and food prices for much of the year, a deteriorating housing sector is the most likely economic trend for consumers, especially among higher-income households.
Following the arrival of the coronavirus pandemic in March 2020, the prices of assets such as houses and stocks rose sharply as Washington pumped money into the economy and interest rates fell to record lows. Year-over-year gains in home prices reached close to 20% on average and even more than that in some Sun Belt markets like Arizona, Southern California and Florida, at 30%.
But that trend began to reverse earlier this year when the Fed signaled a sea change in its easy-money policies and fiscal stimulus ran out. Inflation accelerated after the Russian invasion of Ukraine at the end of February. The general economic picture is now one of higher prices and higher borrowing costs.
“At today’s rates and home prices, buyers who purchase a home pay 80% more for the same home than if they purchased it at the same time last year,” Realtor.com noted on its site. Saturday.
“People who have been searching diligently for the last six months are frustrated because they have experienced the impact in real time,” mortgage lender Shmuel Shayowitz, of Approved Funding in River Edge, New Jersey, told the site. “Anyone who doesn’t really need to buy or who isn’t in a rental bind where their rent keeps going up, they’ve pulled out. [from purchasing homes].”
While much of the public angst about the economy has focused on rising prices, it is the prospect of falling home and stock prices (down 25% from a year ago) that could be Equally bad for the economy, since home purchases tend to lead to more spending on related items like appliances, furniture, and flush investment accounts they also lead to spending on travel and even homes.
While consumer spending has been stable, it has declined when inflation is factored in and there has been a noticeable shift in spending from goods to services such as health and personal care.
The economic news of the week concludes with the publication of the main economic indicators on Thursday. The forecasts are for a monthly fall of 0.3%.