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Thoughts From Last Week
A slowdown in the housing market will drag on economic growth, and with other parts of the economy beginning to slow as well, the risk of a policy error by the Federal Reserve continues to rise.
As the U.S. Federal Reserve continues to aggressively tighten monetary policy, the average 30-year mortgage rate has skyrocketed to a two-decade high of 6.94%. These higher borrowing costs, coupled with elevated home prices, have pushed housing affordability down to multi-decade lows and weighed on housing market activity overall. Underscoring this slowdown has been existing home sales, which have contracted every month since the start of the year and fell 1.5% m/m and 23.8% y/y to a seasonally adjusted annual rate of 4.71 million in September. Furthermore, and as shown in this week’s chart, the NAHB Housing Market Index, which measures homebuilder confidence, dropped for the tenth straight month to levels last seen during the pandemic. Finally, this weakness has also reflected in housing starts, which fell 8.1% m/m to an annual rate of 1.439 million last month.
While U.S. home prices have started to moderate, we do not expect a collapse in the housing market. For one, the inventory of new and existing single-family homes is 1.536 million, well below the long-term average of 2.399 million. Further, leverage in the housing market, as measured by mortgage debt service payments as a percent of disposable income, sits at 3.9%, just more than half of the 7.2% peak seen in 2007. That said, a slowdown in the housing market will drag on economic growth, and with other parts of the economy beginning to slow as well, the risk of a policy error by the Federal Reserve continues to rise.
Source: NAHB, Census Bureau, J.P. Morgan Asset Management.