Quiver Quantitative - The U.S. housing market, a critical gauge of economic health, encountered a more pronounced dip than anticipated in October, as the Commerce Department reported a 5.6% decrease in new single-family home sales. This contraction to a seasonally adjusted annual rate of 679,000 units reflects the strain of elevated mortgage rates on affordability, despite the underpinning support from a glaring shortage of existing homes for sale. The downward revision of September's figures only amplifies the market's softening, diverging from economists' expectations of a softer landing at a rate of 723,000 units.
Amidst this contraction lies a silver lining — the year-on-year comparison still shows a 17.7% uptick in sales, suggesting a complex interplay between long-term market trends and the immediate impact of interest rate hikes. With a nearly halved inventory of existing homes since the pandemic's onset, the National Association of Realtors highlights the tension between the current demand surge and the mortgage rate spike, deterring potential sellers content with sub-3% rates from entering the market. This dynamic has inadvertently fueled the demand for new constructions, reflected in the third quarter's rebound in residential investment after nine consecutive quarters of decline.
The volatility of the housing market is further intensified by the fluctuating mortgage rates, which peaked at an average of 7.79% in late October — a zenith not seen since 2000 — echoing the Federal Reserve's commitment to tempering inflation through aggressive rate hikes. Although the 30-year fixed-rate mortgage has since receded to an average of 7.29%, the overarching narrative is one of cautious optimism about the Fed's future moves, with signals pointing towards a potential easing of policy by mid-2024.
In this nuanced landscape, the resilience of new construction demand illuminates a broader economic dialogue, suggesting that while the Fed's tightening measures reverberate through the housing sector, their impact may be cushioned by the deep-rooted demand and the unique circumstances of the pandemic-era mortgage landscape. As the housing market navigates these headwinds, it remains a pivotal barometer for the trajectory of the broader U.S. economy.
This article was originally published on Quiver Quantitative