Economy and Mortgage Market Trends
As we step into the second half of 2023, the U.S. economy continues to demonstrate resilience amidst the challenges posed by rising interest rates. The housing market has experienced its own set of impacts, particularly with millions of homeowners opting to stay in their current homes, effectively reducing housing inventory. In this comprehensive analysis, we delve into the economic landscape, the housing market’s trajectory, and the recent developments in the mortgage market, shedding light on the potential implications for the future.
Economic Resilience Amid Rising Interest Rates
The U.S. economy grew at its long-run average rate of 2% during the first quarter of 2023, despite the impact of rising interest rates. While certain sectors, such as residential fixed investment and business investment, were affected by higher rates, consumer spending remained robust. Consumer confidence played a pivotal role in driving spending, with the June 2023 measure reaching its highest level since January 2022. Additionally, inflation started to cool off, with the core price index for personal consumption expenditures coming in at 4.6% year-over-year in May.
- Real GDP Growth and Consumer Confidence As per the U.S. Bureau of Economic Analysis, the third and final estimate of the first quarter of 2023 Real Gross Domestic Product (GDP) showed stronger growth than previously reported, reaching an annualized rate of 2%. The undaunted U.S. consumer remained resilient, with consumer spending contributing to the upward revision of real GDP growth. Moreover, the June 2023 measure of consumer confidence jumped to its highest level in over a year, reflecting improvements in current conditions and future expectations.
- Labor Market Strength The labor market continued to showcase its strength, adding 209,000 jobs in June 2023. The unemployment rate remained below 4%, and the prime-age labor force participation rate reached its highest level since April 2002. This trend indicated that many younger workers were re-entering the market, influenced by the tight labor market.
- Moderating Inflation Inflation, which had been a concern, showed signs of cooling off. Core PCE inflation, excluding food and energy, came in at 4.6% year-over-year in May 2023. Additionally, super core service inflation, a measure tracked by the Federal Reserve, has been decreasing since September 2022, further contributing to the moderation of inflationary pressures.
Impact on the Housing Market
The housing market experienced the effects of high-interest rates, with existing home sales receding 20% from a year ago. In contrast, new home sales were surprised with a 20% increase from the previous year in May 2023. The mortgage rate lock-in effect was instrumental in keeping existing home listings down 35% compared to the pre-pandemic average. Despite these challenges, builder confidence improved to its highest level in nearly a year, and housing starts jumped 21.7% in May 2023. House prices showed signs of firming up in the short run.
- Divergence in Home Sales Existing home sales declined while new home sales saw an unexpected increase, indicating a widening divergence between the two segments. The mortgage rate lock-in effect continued to impact existing home listings, resulting in a significant drop compared to the pre-pandemic average.
- Optimistic Builder Confidence improved, primarily due to sustained housing demand and easing supply chain issues, coupled with a lower level of existing homes available for sale. The three subcomponents of the Housing Market Index (HMI) – sales expectations, current sales conditions, and buyer traffic – all saw positive gains, reflecting a positive sentiment in the housing market.
- Housing Starts and Prices Housing starts soared in May 2023, recording the highest monthly increase in over three decades. Builder confidence and increasing permits contributed to this surge. House prices showed signs of bottoming out, with the FHFA’s Purchase-Only House Price Index revealing a 0.7% increase nationally from March to April 2023.
Mortgage Market Performance
Mortgage rates stabilized in June, settling at 6.7% for the 30-year fixed-rate mortgage, following the Federal Reserve‘s decision to pause interest rate hikes. In response to the stabilization, both purchase and refinance applications increased, signifying positive momentum in the mortgage market. Delinquency rates remained close to historical lows, further bolstering the market’s performance.
- Stabilizing Mortgage Rates The 30-year fixed-rate mortgage saw a steady rate of 6.7% in June, offering some relief to potential homebuyers. This stability resulted in a notable increase in both purchase and refinance applications, indicating a strong response from borrowers.
- Healthy Mortgage Performance remained healthy, with delinquency rates declining to 3.1% in May 2023, near historical lows. Additionally, foreclosure starts stayed considerably below 2019 levels, signifying the market’s resilience.
As we navigate through the economic, housing, and mortgage market trends in July 2023, the U.S. economy demonstrates resilience amid rising interest rates. Strong consumer confidence, a robust labor market, and moderating inflation contribute to the positive outlook. However, the housing market faces challenges, with existing home sales declining while new home sales surging. The mortgage rate lock-in effect continues to impact existing home listings, but builder confidence remains high. As we proceed cautiously into the future, we must be mindful of the ever-changing economic landscape and adapt our strategies accordingly to ensure a stable and thriving financial environment.