2018 in Review: A Stronger Economy vs. a Slowing Housing Market

About this same time a year ago, I wrote about an economy which was gradually building enough strength to spark inflation, thus impacting costs for suitable land, labor and materials.  Following that, the tax cuts enacted at the beginning of 2018 have certainly turbo-charged an already improving economy, resulting in robust consumer confidence, more job openings than candidates to fill them, and the lowest unemployment rate in nearly 50 years.

For the housing market, however, rising interest rates, lack of inventory and high prices have definitely conspired to slow sales for both new and existing homes.

U.S. GDP growth, which averaged 2.3 percent in 2017, surged to 4.2 percent by the second quarter of 2018, slipping to a still-strong advance estimate of 3.5 percent during the third quarter.  Notably, it was increasing consumer spending during the third quarter which made up for a slowdown in business investment. Still, current forecasts are suggesting this rate of growth to fall below 3.0 percent during the final quarter of the year.

Job growth, which rose by 250,000 in October, averaged 212,500 per month through the first ten months of 2017 (up 18.3 percent from the same period of 2017), with much of that growth noted in the fields of construction, manufacturing, health care and professional services.  In addition, October’s official unemployment rate of 3.7 percent is the lowest reported since mid-1969.

Not surprisingly, as of the end of September, the number of unfilled jobs was nearly 18 percent higher than the number of officially unemployed persons, which is the primary reason we’re starting to see more wage inflation of close to 3.0 percent per year.

Speaking of inflation, the Federal Reserve has been keeping it mostly in check so far in 2018 with three rate hikes, and a fourth planned for December.  However, given that the Producer Price Index – which tracks wholesale input prices – jumped by 0.6 percent in October (or three times what was forecast), the odds for that fourth rate hike have certainly increased.

Still, the Consumer Price Index remains fairly tame, rising by 2.3 percent year-on-year through September versus 2.1 percent in 2017.  Moreover, the annual increase in the Fed-preferred PCE Price Index has been trending lower since the summer months, falling to 2.0 percent by September.

Consumer confidence has also helped prop up the economy in 2018, with the University of Michigan’s widely watched sentiment index remaining at its highest year-to-date level since 2000.  Even stock market volatility, inflation and polarized politics have done little to dent consumer confidence, with consumers feeling flush enough to tap their savings or borrow money to fund their purchases.

Nonetheless, a booming economy with rising inflation and home prices often takes an eventual toll on the housing market.  Although builder confidence remained strong at 68 in October, building permits took a breather in September, slipping slightly from both the previous month and the same month of 2017.  September housing starts also dipped moderately from August, but were up 3.7 percent year-on-year.

Yet it was September’s preliminary new home sales which dropped the most, falling 13.2 percent year-on-year to the lowest level in nearly two years as the months of supply jumped to 7.1 months, the highest since March of 2011.  However, since this data is regularly revised, it’s possible that new home sales have merely flattened out in line with building permits.

In its own survey, the Mortgage Bankers Association showed September new home mortgage applications up 8.2 percent year-over-year, and year-to-date sales for 2018 were still up 3.1 percent versus 2017.

For existing homes, a combination of low inventory for starter homes and higher interest rates helped drive down September sales down 4.1 percent year-on-year, for the lowest annual sales rate since November 2015.

Unsold inventory rose slightly to a 4.4-month supply, up from 4.2 months a year ago, while the median sales price rose 4.2 percent, for the 79^th straight month of year-on-year gains. Although September pending home sales did rise slightly from August, they were still down 1.0 percent year-on-year, and have fallen on an annual basis for nine consecutive months.

Another indicator of affordability, the NAHB/Wells Fargo Housing Opportunity Index, fell to 56.4 percent in the third quarter of 2018, for the lowest rate since the same quarter of 2008, and down sharply from the last peak of 77.5 in 1Q 2012.  Consequently, in the months ahead, look for more affordable supply and rising wages to counteract higher interest rates in order to keep the housing market humming.