Economic, Housing and Mortgage Market Outlook – October 2023

Economic, Housing and Mortgage Market Outlook – October 2023

Recent developments in the American economy

The US economy continues to expand, according to the latest estimates from the Bureau of Economic Analysis (BEA). Real GDP growth for the second quarter of 2023 was 2.1%, while first-quarter growth was revised upward to 2.2%. The growth rate of personal consumer spending decreased from 3.8% in the first quarter to 0.8% in the second quarter. This decrease in consumer expenditures was offset by an increase in investment expenditures, which rose from -9.0% in the first quarter to 5.2% in the second quarter. The highest real GDP growth of more than 2% is higher than the Congressional Budget Office’s estimate of potential real GDP growth, which was 1.8% for 2023 as of the most recent estimate.1

The labor market remains strong with the U.S. economy adding 336,000 jobs in September 2023, according to the latest report from the Bureau of Labor Statistics (BLS). September’s monthly gains were higher than the previous 12-month average of 267,000. Job growth was driven by leisure and hospitality; Government; health care; Professional, scientific and technical services; and social assistance. Nonfarm payroll growth for July and August was revised by 119,000, with job growth in July and August revised by 40,000. As we noted in last month’s outlook, salary growth revisions were negative for each of the first six months of 2023. The reversal of the trend of negative salary revisions is another sign of the resilience of the US labor market.

The unemployment rate remained unchanged at 3.8% in September, as did the number of unemployed at 6.4 million. The labor force participation rate and the employment-to-population ratio remained unchanged at 62.8% and 60.4%, respectively. Job openings rose to their highest level since mid-2021 at 690,000 in August, according to the Bureau of Labor Statistics. The job-unemployed ratio remains high at 1.5 as of August 2023.

On the inflation front, price pressures are showing signs of easing, with the August reading falling short of expectations. While overall inflation has fallen, energy prices are rising again, posing upward risks to the future path of inflation. Core inflation, excluding food and energy, rose 0.1% month-on-month as measured by the BEA Personal Consumption Expenditures (PCE) price index. Even with the recent rise in prices, year-on-year core PCE price inflation was 3.9%, the lowest annual increase since mid-2021. Prices for goods and services rose during the month with goods inflation rising by 0.8% and services increasing more modestly by 0.2. %. Services excluding energy and housing — the “super core” inflation measure that the Fed closely tracks — remained flat in August and rose 4.2% year over year.

Recent developments in the US housing market

Interest rates have been above 7% since August of this year, the highest level since the early 2000s. Higher prices are causing more homebuyers to delay their home purchases and wait for a more favorable time. Existing home sales, as reported by the National Association of Realtors (NAR), are down 15.3% from August 2022, but the median sale price of existing homes is up 3.9% over the same period. The lack of existing home inventory is causing more homebuyers to consider new homes. New home sales for August rose 5.8% from a year ago, according to the U.S. Census Bureau. The median sales price of new homes has fallen 2.3% since August 2022 to $430,000 in August 2023. Combining new and existing home sales, total home sales are down 12.8% from last August.

Homebuilders are becoming less confident, as measured by the National Association of Home Builders (NAHB) Housing Market Index. High interest rates and supply-side constraints are putting pressure on suppliers’ ability to build new homes. All three components of the Housing Market Index fell, indicating weak demand from homebuyers and seller confidence. To increase sales, a growing number of homebuilders are adding incentives and lowering the prices of new homes. This decline in sentiment is also reflected in the decline in the number of homes started in August, which was down 14.8% from last August, and down 4.3% since the beginning of this year. The NAR’s Pending Home Sales Index, another forward-looking measure of home buying, also fell 18.7% year-over-year.

While housing supply and demand measures are declining, the tighter supply level outweighs the decline in demand, which translates into upward pressure on housing prices. Home prices rose 4.6% in July according to the Federal Housing Administration’s Home Purchase Price Index.

Treasury yields rose to their highest levels in 16 years, with the yield on the 10-year Treasury bond reaching a high of 4.8% on October 17, 2023. Rising 10-year yields also pushed mortgage rates to their highest levels in 23 years. The average 30-year fixed-rate mortgage in the United States, as measured by Freddie Mac’s primary mortgage market survey® The interest rate rose in August, reaching 7.49% during the first week of October, a level not seen since December 2000. Higher interest rates have reduced demand for mortgages. According to the Mortgage Bankers Association’s weekly applications survey, the total mortgage applications index was down 25% and the purchase index was down 27% over the year during the third week of September, while the refinancing index was down 21% over the year. Compared to the pre-pandemic average for 2016-2019, purchases were down 41% during the third week of September and down 58% from their peak in early 2021.

While mortgage delinquencies have remained low so far, there has been an uptick in mortgage delinquencies across the spectrum according to a Transunion report released in August 2023. Loans delinquent by 30 days or more rose to 2.04% in August 2023 from 2% in July 2023. On the other hand, loans delinquent by 60 days or more rose to 0.94% in August 2023 from 0.91% in July 2023. The serious delinquency rate rose to 0.59% during August 2023 from 0.58% in July. 2023 and 0.55% in August 2022.

The look

While current conditions in the economy remain strong and have exceeded expectations so far this year, the outlook remains uncertain. The rise in interest rates in September coupled with higher gasoline prices dented consumer confidence and likely contributed to a slowdown in consumer spending in the second half of the year. Recent geopolitical developments have increased uncertainty and could lead to a further slowdown in growth. But American consumers have weathered significant shocks over the past two years, and overall enjoy strong balance sheets even if they have nearly exhausted their excess pandemic-related savings. Our basic view is that of a slowing economy that avoids sliding into recession.

We expect US economic growth to slow at the end of this year and remain weak in 2024. Inflation will continue to moderate, but the reduction will be gradual so that policymakers will keep interest rates higher for longer. In this environment, mortgage rates will remain high, although lower bond market volatility will allow the spread between Treasury bonds and mortgage rates to narrow toward historical averages.

Mortgage rates reaching new highs have presented many challenges, especially for homebuyers. Due to higher interest rates, fewer buyers and sellers are likely to enter the housing market, affecting demand and supply. The combination of high mortgage rates pulling down demand and a lack of supply driven by flat prices will actually keep sales volume low through the rest of the year.

Mortgage origination volume is expected to remain weak through the rest of the year. Although we expect house prices to rise over the next 12 months, the positive impact of prices on construction volumes is offset by lower sales volumes. We expect the refinancing market to be significantly impacted by rising interest rates, which will keep refinancing volumes near historic lows. Together, we expect total mortgage assets to remain flat for the rest of the year with modest growth in 2024.

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