The housing market matters, if only for being the primary source of wealth for American households, regardless of income or status.
The stock market participation rate of Americans, although lower than the peak levels recorded before the 2008 global financial crisis, remains stable at around 61%, according to recent Gallup data.
However, while nearly 8 in 10 wealthy Americans actively buy stocks, that number drops to about 2 in 10 for those who earn less than $40,000 a year.
Census Bureau data, however, suggests U.S. homeownership rates of around 66%. While wealthier families are more likely to own their own home, the ownership rate for those earning around $40,000 a year is just under 60%. according to a Barclays study.
Home values are much higher ($52 trillion, according to a Zillow report from late 2023) than the stock market, which was around $41.92 trillion on Friday.
That could explain why so many Americans feel uncertain about the state of the economy, even as stocks hit new all-time highs, companies continue to hire more workers and inflation continues to slow.
A recent CNN poll noted that 48% of respondents said the economy “remains in recession” despite a GDP growth rate of 3.3% in the fourth quarter and a current quarterly rate of 2.9%. .
Apparently if it's not happening in housing, Americans aren't sorry.
And that's not likely to change anytime soon.
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It's all about interest rates.
Mortgage rates remain the main driver of housing market activity, whether in terms of outright purchases or the levels of investment that homebuilders are willing to commit to starting new construction.
Treasury yields, in turn, also play a crucial role in the housing market, setting the tone for housing affordability and refinancing demand.
Bond prices, which move in the opposite direction to Treasury yields, have been falling sharply for much of the past two weeks and have accelerated further over the past four days, following readings above expectations of both consumer prices and factory-gate inflation in January. .
The 10-year Treasury yield, closely tied to benchmark 30-year mortgage rates, has risen more than 44 basis points this year, which could add up to half a percent to real estate borrowing costs in the near future. term.
Related: Inflation Deals a Killing Blow in stocks' Battle to 'Fight the Fed'
Last week, the Mortgage Bankers Association said the average 30-year fixed rate rose seven basis points to 6.8%, the highest since early December. That gain came ahead of the seven-day period before January's complicated inflation reports.
Mortgage rates are likely to move above 7% in the coming weeks, acting as “an additional reminder that the recovery will be bumpy as buyers remain sensitive to changes in interest rates and costs.” according to Robert Dietz, chief economist for the National Association of Home Builders, or NAHB.
Before the rise in Treasury yields, homebuilder confidence was rising, reaching levels last seen in August. NAHB President Alicia Huey noted that members believe that “even small drops in interest rates will produce a disproportionate positive response among prospective homebuyers.”
Housing starts stop
This was not entirely evident in January's housing construction figures. They showed a 14.8% decline from December to a run rate of 1.33 million units. Building permits, a good indicator of demand, fell 1.5% to 1.47 million units.
Single-family construction, demand for which is primarily tied to mortgage rates, fell 4.7%, while multifamily construction, more closely tied to rental prospects, plummeted 35.6%.
Bill Adams, chief economist at Comerica Bank in Dallas, believes the slowdown is likely weather-related, wisely noting that the drop in permits was much smaller than the overall rate of new construction.
“It's easier to file paperwork during a snowstorm than it is to start construction on a new home,” he said. “Real estate activity, like consumer spending and mining production, should recover in February and March as weather becomes less of a factor.”
The average 30-year FRM rises to 6.77% https://t.co/K9HBh1pgw5 Chief Economist @TheSamKhater: "Mortgage rates rose this week. “So far, the economy has performed well this year and rates may remain high longer, which could slow the spring home buying season.”
—Freddie Mac (@FreddieMac) February 15, 2024
That view is shared by Ian Shepherdson of Pantheon Macroeconomics, who notes that uneven elements in housing data from earlier in the year cloud the “gentle upward trend” in single-family construction.
“Monthly housing starts numbers are extremely noisy and prone to revisions, but the general picture is that single-family housing starts are trending upward, lagging the decline in mortgage rates towards the end of last year, while that multifamily housing starts are trending downward, delaying the recovery in rent inflation,” Shepherdson wrote.
But any real estate recovery will also need support from the bond market. Unfortunately, it is spooked by the surprise pick-up in inflation pressures and a Federal Reserve that is responding strongly to expectations of a spring rate cut.
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Federal Reserve Chairman Jerome Powell stressed that he and his colleagues do not include housing market activity in their rate-setting targets, even as lawmakers continue writing letters urging him to make housing more affordable.
Related: Federal Reserve Members Just Previewed What's Next for Interest Rates
“We're not targeting house price inflation, housing costs or any of those things,” Powell told reporters in late January. “Those are very important things to people's lives, but they're not the things we're targeting.”
The Fed targets inflation, not home purchases
Comments late last week from Atlanta Fed President Raphael Bostic also reminded investors that the market's forecasts for near-term rate cuts are still not aligned with those of the central bank.
“My expectation is that the inflation rate will continue to decline, but more slowly than the pace implied by where the markets indicate monetary policy should be,” Bostic said at an event in New York, adding that he is “not yet comfortable with inflation increasing.” declining inexorably towards our 2% target.
Rates traders, who just a month ago estimated the odds of a rate cut in March at 63.1%, have reduced those odds to just 10.5%, according to the CME Group's FedWatch tool.
The best odds for the first rate cut of the year are no better than a June coin flip, with new Federal Reserve projections expected in March that could push those bets into the summer and possibly beyond.
“The economy has performed well so far this year, and rates may remain high longer, which could slow the spring home-buying season,” Freddie Mac's chief economist said last week. Sam Khater.
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