Fannie Mae reported This Week in Real Estate that its most recent Home Purchase Sentiment Index reached an all-time high, fueled by significant increases in consumer sentiment related to job confidence and mortgage rates. Below are a few highlights from the first week of August that influence our business:
Housing Sentiment Hits New Survey High. The Fannie Mae Home Purchase Sentiment Index (HPSI) increased 2.2 points in July to 93.7, a new survey high. Five of the six HPSI components increased month over month, with an 8-percentage point increase in the net “Confidence About Not Losing Job” component driving the index higher. On a year-over-year basis, the forward-looking job confidence and “Mortgage Rates Will Go Down” components are up 16 and 24 percentage points, respectively. The net share of Americans who say it is a good time to buy a home increased 3 percentage points to 26%. This component is up 2 percentage points from the same time last year. The net share of those who say it is a good time to sell a home increased 1 percentage point to 44%. This component is up 3 percentage points from the same time last year. “Consumer job confidence and favorable mortgage rate expectations lifted the HPSI to a new survey high in July, despite ongoing housing supply and affordability challenges,” said Doug Duncan, Senior Vice President, and Chief Economist. “Consumers appear to have shaken off a winter slump in sentiment amid strong income gains. Therefore, the sentiment is positioned to take advantage of any supply that comes to market, particularly in the affordable category.”
Home Price Picture Grows More Complex. Anyone trying to make sense out of current data on the direction of home prices needs more than a calculator. Every new report seems to dump more mud in the water, show price growth slowing, stabilized or driven higher by falling interest rates. This is understandable given the two-month lag-time of most price indices, but Wednesday’s slightly more timely report from the National Association of Realtors® (NAR) doesn’t add any clarity. The report on second-quarter metropolitan home prices shows that most of those areas saw price gains during the reporting period with single-family median prices increasing in 91 percent or 162 of the 178 markets tracked. That is up from 86 percent that saw increases in the first quarter. The median price of a single-family home gained 4.13 percent on an annual basis to $279,600. Lawrence Yun, NAR chief economist, said despite the need for new homes, construction fell in the first half of the year. “This leads to continuing tight inventory conditions, especially at more affordable price points. Home prices are mildly reaccelerating as a result,” he said. Ninety-three of the 178 markets had a price growth of 5 percent or better and Yun said lack of affordability will hinder sales regardless of the job situation in a local market. “This is evident in the very expensive markets as home prices are either topping off or slightly falling.” Looking forward, Yun says, “The exceptionally low mortgage rates will help with housing affordability over the short run. But if the low-interest rates are due to weakening economic confidence, as reflected from a correction in the stock market, then the low rates will not help with job growth and will eventually hinder home buying and home construction.”
Lower Interest Rates: What They Mean For Housing and The Economy. Interest rates continue to decline, as investors reset their expectations of both near-term economic growth and their tolerance for risk. Most analysts, including the NAHB forecast, expected economic growth to be slower in 2019 than 2018. However, rising trade concerns are adding uncertainty to the outlook, and uncertainty causes a flight to quality for investors. The corresponding portfolio adjustments produce declines in stock prices and increased demand for bonds. Higher bond prices, in turn, yield lower interest rates. That’s what we are witnessing in financial markets this week. What does this mean for housing, and builders and remodelers? First, now is a good time to buy a home or finance a home improvement project, provided the right home is in inventory or a remodeler is available. Lack of entry-level single-family housing remains a challenging headwind for younger households trying to obtain homeownership, particularly due to lack of construction. Second, while the costs of buying a home, developing land, and building housing are now lower, caution is required by market participants because rates have declined on increased uncertainty. Third, a renewed focus on advocacy for improved homeowner and renter housing affordability is required.
Finally, current credit market conditions are a reminder of the typical role housing plays in business cycles. Housing often feels the pain first and then leads the economy out of downturns, soft patches and recessions because low rates stimulate more housing construction. Given that low rates have returned to the marketplace but home construction has not yet responded in a significant way in 2019, progress must be made on other affordability challenges for housing to provide a lift to economic growth. In the meantime, solid levels of builder confidence suggest growth for single-family permits ahead.