Housing Activity Looks to Have Turned as New Home and Pending Sales Slow Meaningfully in April

Key Takeaways:

• The minutes from the Federal Open Market Committee’s (FOMC) May 3-4 meeting showed that with the backdrop of a strong economy, tight labor market, and high inflation, “most participants” would likely be in favor of continuing 50-basis point rate hikes at the “next couple of meetings.” Further, “a number of participants” stated it would be appropriate for the Committee to consider sales of agency MBS once the balance sheet run-off “was well under way” and that such action would be announced “well in advance.” In addition, “many” participants noted that a quicker pace of policy tightening would leave the Committee “well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”
• Gross domestic product (GDP), adjusted for inflation, decreased at a 1.5 percent seasonally adjusted annualized rate (SAAR) in Q1 2022, a decrease of one-tenth from the preliminary estimate, according to the second estimate from the Bureau of Economic Analysis. The revision was due primarily to downgrades to inventory investment and residential fixed investment, which were partially offset by an upgrade to personal consumption growth.
• Durable goods orders increased 0.4 percent in April, according to the Census Bureau. Orders for motor vehicles and parts slipped 0.2 percent after a 4.8 percent jump in March. Core capital goods orders (nondefense excluding aircraft) increased 0.3 percent. Shipments of durable goods rose 0.1 percent, the eighth consecutive monthly increase but the weakest growth in that period. Unfilled orders and inventories of durable goods were up 0.5 percent and 0.8 percent, respectively.
• New single-family home sales fell 16.6 percent to a SAAR of 591,000 in April, the third straight monthly decline and the lowest level since April 2020, according to the Census Bureau. This follows a downward revision of about 7 percent to the March data. The number of new homes for sale rose 8.3 percent to 444,000, causing the months’ supply to jump by 2.1 to 9.0. There is a caveat, however, that only 8.6 percent of those homes for sale are completed (in 2019, an average of 24.1 percent of new homes for sale were completed).
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, declined 3.9 percent to 99.3 in April, the sixth consecutive monthly decline.

Forecast Impact:

The FOMC minutes were in lockstep with the Committee’s earlier statements and Chairman Powell’s May press conference. We continue to expect two 50-basis point hikes to the federal funds rate at the FOMC’s June and July meetings, and we think MBS sales are not likely to begin until sometime next year. Further, the somewhat muted durable goods report is consistent with our forecast for slightly slower, yet still robust, business fixed investment in Q2. Though investment does face some headwinds, including higher interest rates, reports from some major companies of slowing consumer demand, and potential issues arising from COVID-related lockdowns in China, we are unlikely to substantially revise our near-term forecast based on this report.

However, the same cannot be said for new home sales, which came in significantly below our expectations and will cause a downward revision to our near-term forecast. While this series is volatile and prone to large revisions, the new homes sales pace in April was similar in level to the slowdown that occurred the last time the Federal Reserve engaged in a tightening regime in 2018. Given the faster pace of mortgage rate increases to date compared to that period, along with greatly stretched housing affordability, we expect that, compared to the 2018 period, a sharper downturn in residential investment is now underway. Existing home sales are also being impacted by the more than 200-basis point increase in mortgage rates since the end of last year as the pending home sales index is now at its lowest level since the end of 2018, excluding the COVID-induced downturn in spring 2020. The index is currently at a level largely consistent with our near-term existing home sales forecast, but it remains to be seen whether this measure continues to fall or if it levels off as mortgage rates appear to have stabilized for now. Still, given the dramatic slowdown in new home sales may be an early indicator of a sharper turn in all housing activity than we had previously expected, a more general downward revision to our housing outlook may be forthcoming.

Nathaniel Drake
Economic and Strategic Research Group
May 26, 2022

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