Resilience in The Housing Market as Powell Sees More Hikes Ahead

A majority of the housing market data on any given month tends to come out mostly on the same week. This was that week and the takeaway was that the housing market could be doing worse. Some might even argue that we're seeing some resilience relative to the rate landscape.

Let's refresh our understanding of the rate landscape first.  The bond market (which drives interest rate movement) has been broadly sideways recently as investors wait to see how quickly inflation (bonds' biggest concern) is subsiding.  That "wait and see" approach prompted the Fed to hold its policy rate steady at last week's meeting, but that was widely expected by the bond market and thus not worth much of a reaction.

Fed Chair Powell gave his regularly-scheduled congressional testimonies this week and had a chance to talk a bit more about where the Fed sees things going from here.  We already knew the average Fed member saw about 2 more rate hikes before achieving a terminal "ceiling" level, assuming the economy evolved as expected, but Powell was able to clarify what "as expected" meant.

Interestingly enough, the additional hikes are not seen happening in response to some additional upward momentum in inflation or economic growth.  Rather, the Fed's baseline expectations call for continued cooling in the labor market, modest economic growth, and continued cooling in inflation.  In other words, inflation and the economy have a very low bar to justify a few more rate hikes.  Things would have to deteriorate pretty abruptly for the Fed to abstain.  Moreover, if things improve a bit better than expected, we could be looking at more than 2 additional hikes.

The problem with these expectations and the actions predicated upon them is the elevated uncertainty about the outlook.  Economic uncertainty is often reflected in sideways trading ranges in the bond market.  Using 10yr Treasury yields as a proxy for other rates (like mortgages), we see clear sideways ranges in the short term.

20230623 jnl2.png

And in the long term.


The longer term chart also serves as the best recap of the rate landscape.  Specifically: rates are high--not as high as they were in late 2022 or even earlier this year, but certainly much closer to the higher end of the range over the past few years.  

20230623 nlad3.png

The rate surge in 2022 had predictable consequences for the housing market, but even though rates remain high, volatility has died down. 

20230621 close.png

Lower rate volatility has helped housing find bottom.  Essentially every housing report that came out this week told a different version of that same story.  Some reports were downright upbeat, such as the surge in "housing starts" (a term that refers to the ground-breaking phase of new construction). Only 10 months have been higher in more than a decade.

20230620 open2.png

This also marked a major reversal in the trend for new construction.  Last month's report showed the worst year-over-year growth in 14 years while the new report showed the best growth in more than a year--a shift of more than 20%.

20230620 nl2.png

This is a notoriously volatile set of data, but swings like this still send analysts looking for explanations.  One of the most commonly cited mitigating factors is the larger and more stable role being played by multi-unit construction. Multi-family starts are right in line with their highest levels in more than 3 decades, and they were essentially unaffected by the 2022 rate spike. 

20230620 starts2.png

The other "yeah but" is that the new home market is quite a bit smaller than the existing home market, and the latter is better described as "treading water," even though the most recent number came out slightly higher than last month.

20230622 EHS1.png

The "yeah but" to that "yeah but" is that inventory is holding the market back.

20230622 ehs2.png

There are a few more of the big monthly housing reports yet to come in the week ahead.  Most arrive next Tuesday morning with New Home Sales expected to stay fairly flat at an annual pace of 670k and the duo of home price indices from FHFA and Case-Shiller (both expected to show slower, near-zero price growth).  Thursday's Pending Home Sales index is expected to show 0.2% growth after holding steady last month.

20230623 nl432.png

Recently Released Economic Data

Time Event Actual Forecast Prior
Monday, Jun 19
10:00 Jun NAHB housing market indx 55 51 50
Tuesday, Jun 20
8:30 May Housing starts number mm (ml) 1.631M 1.4M 1.34M
8:30 May Building permits: number (ml) 1.491M 1.42M 1.417M
Wednesday, Jun 21
7:00 Jun/16 MBA Refi Index 425.1 434.1
7:00 Jun/16 MBA Purchase Index 165.6 163.2
10:00 Fed Chair Powell Testimony
Thursday, Jun 22
8:30 Jun/17 Jobless Claims (k) 260 262
10:00 May Existing home sales (ml) 4.3M 4.25M 4.29M
10:00 May Exist. home sales % chg (%) 0.2% -3.2%
10:00 Fed Chair Powell Testimony
Friday, Jun 23
9:45 Jun S&P Global Manuf. PMI 46.3 48.5 48.4
9:45 Jun S&P Global Services PMI 54.1 54 54.9
Tuesday, Jun 27
8:30 May Durable goods (%) 1.7% -1% 1.2%
9:00 Apr FHFA Home Price Index m/m (%) 0.7% 0.3% 0.5%
9:00 Apr FHFA Home Prices y/y (%) 3.1% 3.1% 3.7%
9:00 Apr Case Shiller Home Prices-20 y/y (% ) -1.7% -2.6% -1.1%
10:00 May New Home Sales (ml) 0.763M 0.675M 0.68M
10:00 May New Home Sales (%) (%) 12.2% 3.5%
Wednesday, Jun 28
7:00 Jun/23 MBA Refi Index 439.2 425.1
7:00 Jun/23 MBA Purchase Index 170.3 165.6
8:30 May Wholesale inventories mm (%) -0.1% -0.3%
Thursday, Jun 29
8:30 Jun/24 Jobless Claims (k) 239K 265K 265K
8:30 Q1 GDP Advance (%) 2% 1.4% 2.6%
10:00 May Pending Home Sales (%) -2.7% -0.5% -0.4%
Friday, Jun 30
8:30 May Core PCE (m/m) (%) 0.3% 0.3% 0.4%
8:30 May Core PCE Inflation (y/y) (%) 4.6% 4.7% 4.7%
9:45 Jun Chicago PMI 41.5 44 40.4
10:00 Jun U Mich conditions 69 68 64.9

Event Importance:
No Stars = Insignificant   |   Low   |   Moderate   |   Important   |   Very Important