*Originally published August 8, 2023
By Tim Courtney, Chief Investment Officer
Recent media coverage1 has hailed a resurgence in the national housing market. The statistics seem to support this premise — with national home prices seeing a pronounced rebound since February after declining for seven straight months.2
We believe the housing market has indeed stabilized. Demand remains resilient despite the Federal Reserve’s continued interest rate hikes since March 2022,3 which are making homeownership more costly. This demand stems not only from continued migration to the U.S., but also millennials who have benefited from solid wage growth and significant savings accumulation during the pandemic, and now seek to become first-time homebuyers.
Additionally there remains a constrained supply amid the strong demand. Reduced homebuilding activity caused by pandemic conditions in 2020 and 2021 created a shortfall that we’re still grappling with.4 Supply is further constrained by many homeowners who locked in great mortgage rates in the 2% to 3% range and are now understandably reluctant to sell, knowing that rates today could be as much as three times higher.5
For most American homeowners, their house is their biggest asset, so the recently stabilized housing market can be a positive economic influence. As homeowners feel wealthier, they’re more likely to spend on vacations, dining out and home improvement projects.6
However, this development poses challenges for the Fed’s delicate balancing act between controlling inflation and maintaining growth. While the decrease in housing prices from the second half of 2022 into early 2023 did help curb inflation temporarily, rebounding home values and the increased spending they can trigger can keep inflation elevated.
The housing market’s recovery also highlights how we’re still working through distortions caused by pandemic-era policies. And these distortions have crowded out many younger buyers who are attempting to create new households.
We might see higher inflation levels embedded in the economy for some time. Or, the Fed may insist on keeping rates higher longer and continuing to contract our money supply in an attempt to get inflation lower. This might help move inflation closer to 2% but would come at an economic cost. While neither scenario is appealing, there has been and will be costs coming from the easy policies designed to jump-start the economy following the onset of the pandemic.7
The stock market still sees this working out OK – and it is certainly possible for the US to experience a smoother economic transition than the rough patch ahead that the bond market is predicting. Confirming that things remain in flux was the news this week that Fitch Ratings has downgraded US debt by one notch. This is their way of reminding us that there is no free lunch. If you have any questions, please contact your Exencial advisor.
- Barron’s Advisor (7/3/23) — The housing market is heating back up. That’s a problem for the Fed.
- S&P Dow Jones Indices (7/12/23) — S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index
- Forbes Advisor (6/14/23) — Federal funds rate history 1990 to 2023
- The Washington Post (6/11/20) — Homebuilding in the pandemic
- Freddie Mac (7/6/23) — Mortgage rates
- CNN Business (5/15/23) — Americans are setting vacation records and splurging at bars, restaurants and hotels
- Investopedia (2/28/23) — U.S. COVID-19 stimulus and relief
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