Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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Will rising interest rates upend the housing recovery? Like an annoying puppy nipping at your heels, that question continues to trail upbeat housing reports, worrying analysts and clouding their forecasts.

Some statistics suggest that the concerns may be justified. Purchase mortgage applications have declined by 14 percent since the beginning of May, when interest rates began to rise, increasing from a record low of 3.31 percent in November of last year to 4.81 percent in the most recent Freddie Mac survey.

The new home market seems to have been hardest hit thus far; new homes sold at an annual rate of 394,000 units in July, 13.4 percent below a June total that was revised downward and the biggest month-over month decline in three years. The July sales also fell well short of a consensus forecast in the 490,000 range, representing what analysts termed “a massive miss.”

New Homes Hit

New home starts rose sharply (by 26 percent) but entirely on the strength of the volatile multi-family sector; single-family starts fell 2.2 percent to their lowest level since November of last year, while single-family permits ― an indicator of future construction activity ─ fell by almost 2 percent.

The July numbers were disappointing but not surprising according to Greg Bird, an economist with Moody’s Analytics, who noted that if the increase in interest rates was going to have an impact, “this is the month you would expect to see it.”

Those new home figures were “ugly,” Joel Naroff, founder and president of Naroff Economic Advisors, agreed, but they don’t necessarily indicate that the housing recovery has hit a wall that prospective buyers won’t be able to scale. “We need to be cautious when there is just a large fall-off in demand, with no real supporting data [to explain it]….Let’s wait a month to see if this is just a glitch in the data or a real trend,” he told USA Today.

Why Are Builders Smiling?

One reason to question the conclusion that higher rates are killing homebuyer demand is the reaction of home builders: Their confidence levels have increased by 34 percent in the last three months. “It is hard to understand why developers would pay for permits, start construction and feel that conditions are getting better if people are not signing up for their product,” Naroff observed in that USA Today interview.

Also indicating that the recovery continues: The time on market for homes (between listing and sale) has fallen to an average of 8.6 weeks (a 3-1/2-year low) and listings drew an average of 2.3 offers in July – another 3-1/2 year low that has been maintained for four consecutive months.

Existing home sales have also remained solid, avoiding (at least thus far) the negative interest rate impact evident in the new-home sector. Existing home sales in July were 6.5 percent above the June pace and 17 percent higher than in July of last year, maintaining an average annualized pace of 5 million units for the third consecutive month.

Those robust figures may be a bit misleading, however, because they reflect transactions closed before mortgage rates began to rise. Pending sales for July were nearly 1.5 percent below the June level, suggesting that rates may be starting to take on toll on the existing market now.

Not a Concern ― Yet

Lawrence Yun, the chief economist for the National Association of Realtors (NAR), says that “modest decline” is not a concern – yet. But he also acknowledged that higher mortgage rates and rising home prices “are impeding monthly contract activity” in some parts of the country, especially in the west, where, he said, “more homes clearly need to be built to relieve price pressure, or the region could soon face pronounced affordability problems.”

But in most areas, Yun said, the “leveling” effect of higher rates is helping to offset tight inventories that he predicts will persist for the rest of this year.

Home prices are still rising, but at a slowing pace. Still, the Case-Shiller 20-city index was up 12.1 percent year-over-year in July, close to the 12.2 percent June gain that was the largest in six years. The median price of existing homes sold in July was $213,500, nearly 14 percent above the year-ago figure and only 7.3 percent below the pre-crash 2006 peak, according to the NAR.

Some analysts are predicting that higher rates (to a point) will do more to bring hesitant buyers into the market than to discourage or disqualify them from purchasing.

“Going forward, more sellers should get off the fence as strong home prices gains should continue, bringing more balance to the low-supplied home resale market,” Jonathan Basile, an economist at Credit Suisse, told the Wall Street Journal.

The most recent labor market report – below estimates but consistent with the slow-but-steady average for this year ― has given some industry executives hope that the Fed will delay plans to ‘taper’ the bond-buying activity that has kept rates low. But the consensus view is that tapering will begin before the end of this year, tempering the optimism of some housing analysts but not leaving most expecting another solid year.

A New Phase

Stan Humphries, chief economist for Zillow, is among those sharing that optimistic view. “After three straight months of annual home value appreciation above 5 percent, the U.S. housing market recovery has proven it is on very sound footing,” he noted in a recent report, adding, “We have entered a new phase in the recovery when we can begin to turn away from ugly recent history and turn toward what the housing market of the future will look like and how it will act.”

He was referring to the ongoing debate about how, when or whether the nation’s housing finance system should be restructured ― an issue with which Congress seems poised to grapple this year.

“It may be tempting to look at how the market is currently performing and think that tackling GSE reform and other large issues is no longer necessary,” Humphries said. “But while we can afford to turn away from the recent past, we cannot afford to forget it, and simply ignoring these problems only dooms us to repeat them. How we handle these all-important policy debates will be critical in keeping the housing market on sound footing for years to come.”