State of the Housing Market

painted ladies
The Federal Reserve’s Federal Open Market Committee held its July meeting on Wednesday. That’s always a good time to take a breath and look at the state of the housing market. This past meeting more so than others.

One thing that those of us who watch the Federal Reserve closely know is that even when there’s no change in rates or change in policy, you have to carefully parse the comments at and after the meeting to know where the market is headed. Wednesday’s meeting portended serious change.

Mike Fratantoni, our Chief Economist and one of the top economists in the entire country, says that the Fed is “embarking on a new course.” He’s absolutely right. We’ve heard for a long time that the Fed will shrink its balance sheet holdings of Treasuries and Mortgage Backed Securities this year. On Wednesday, they said it would be happening ‘relatively soon.’  That’s Fed speak for an announcement, likely in September, that they will begin winding down their holdings in October.

The Fed believes that inflation will accelerate later this year and into next, and MBA’s economists agree. We anticipate this will prompt further increases in the Fed’s short-term target, with the next hike most likely coming in December. Stock markets are near record highs, and wages are beginning to creep up. Inflation is likely to follow.  While interest rates have been creeping up, they are coming off historic lows, they remain well under long-term averages.

Although the recovery from the financial crisis was drawn out, today unemployment stands at very low levels. Poor credit and sluggish wage growth remain an issue, but the greatest barrier prospective home buyers will face today is limited housing inventory

Existing home sales in June were down and new home sales were up slightly, relative to the previous month, as tight inventories of homes for sale continued to constrain purchase activity.  Additionally, home prices continue to appreciate at an almost 7 percent rate on a YOY basis, based on May data from the FHFA. MBA’s purchase applications index has shown some leveling off for the year, in terms of purchase activity, but the index for every month in 2017 was higher than the corresponding month in 2016.

Monthly job growth topped 200,000 jobs in June for the fourth time in six months, even as the unemployment rate ticked up slightly to 4.4 percent. These are indications that the job market is still healthy and the economy is at full employment. We are well below the five percent mark for unemployment and adding more than 150,000 jobs per month. Historically, job growth of around 100,000 per month has been sufficient to keep the unemployment rate steady.

So back to the Fed.  All this relatively strong data is driving the Fed’s decision to both begin winding down its balance sheet later in 2017 and continue raising rates. Nonetheless, inflation continues to be the wildcard, casting a little uncertainty on the timing and pace of the Fed’s actions.

The bottom line is that the economy is strong and improving. Interest rates remain low and employment is high, which, when combined with the coming demographic shift as more millennials enter prime household-creating years, suggests the housing market is on a steady course for the foreseeable future.

That’s the view from D.C.- what are you seeing out there?