Real Personal Income is Flat as New Home Sales Increase Temporarily while Annual Home Price Growth Decelerates Amid Rising Mortgage Rates

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, declined 0.6 percent in Q2 2022 according to the third estimate from the Bureau of Economic Analysis (BEA), unchanged from the prior estimate. As part of the BEA’s annual revision process, gross domestic income (GDI), a theoretically equivalent measure to GDP, is now estimated to have risen 0.8 percent in Q1 2022 and 0.1 percent in Q2, downgrades of 1.0 and 1.3 percentage points, respectively.
• Personal income, adjusted for inflation, was flat in August, though July’s figure was revised upward from a 0.3 percent gain to a 0.5 percent increase, according to the BEA. Real disposable personal income and personal income less transfer payments both increased 0.1 percent. Real personal consumption expenditures also rose 0.1 percent, led by a 0.3 percent increase in real services expenditures. The PCE price index increased 0.3 percent over the month and was up 6.3 percent on an annual basis. Core PCE increased 0.6 percent in August and 4.9 percent over the year, an acceleration of two-tenths.
• Durable goods orders declined 0.2 percent in August, the second consecutive monthly decline, according to the Census Bureau. The decline was largely due to a pullback in aircraft orders, however, as core capital goods orders (nondefense excluding aircraft) rose 1.3 percent, their largest monthly gain since January. Shipments and inventories of durable goods rose 0.7 percent and 0.2 percent, respectively.
• The Conference Board Consumer Confidence Index increased 4.4 points to 108.0 in September, its highest level since April following two consecutive increases. Confidence in the present situation was up 4.3 points to 149.6 and the index for consumer expectations rose 4.5 to 80.3, the highest level since February.
• New single-family home sales jumped 28.8 percent to a seasonally adjusted annualized rate (SAAR) of 685,000 in August, the highest rate since March, according to the Census Bureau. Compared to a year ago, new home sales were flat. Despite the faster sales rate, new homes for sale still rose a modest 0.4 percent to 461,000, 49,000 of which are completed, the highest level in two years but still well below 2019 levels. The months’ supply declined by 2.3 months to 8.1.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closes by one to two months, declined 2.0 percent in August to 88.4.
• The FHFA Purchase-Only House Price Index rose 13.9 percent compared to a year ago in July, a deceleration of 2.4 percentage points compared to June. Additionally, on a seasonally adjusted basis, home prices declined 0.6 percent over the month, the largest monthly decline since 2011.

Forecast Impact:

Prior to the annual revision to gross domestic income, we had speculated that the gap between GDP and GDI would be at least partially revised away. However, we thought this would occur in part via upward revisions to GDP primarily due to very strong hiring this year, when in fact the gap shrunk almost entirely due to a downward revision to GDI. GDP was largely unchanged. This likely won’t fundamentally change our forecast moving forward (though the composition of the expected return to growth in Q3 will change somewhat due to revisions in Q2), but it does confirm that recent productivity growth has been some of the worst since the aftermath of WWII. This presents some upside risk to our forecast, as near-historically weak productivity growth could be followed by a surge in productivity as business conditions normalize after the COVID shock. However, there’s also some risk that the drivers of poor productivity growth in the first half of the year, which are not fully understood, may represent longer-lasting challenges.

Personal income growth was muted in August as rising prices continued to cut into nominal wage gains. Still, a positive number is better than what we saw for most of the first half of the year and, when combined with the upgrade to July and rising consumer confidence, remains supportive of our forecast for a modest return to growth in Q3. Further, core durable goods orders came in stronger than expected, potentially signaling stronger business fixed investment than anticipated, though we continue to believe there will be a slowdown in this area as interest rates rise.

Housing market data was mixed this week, but, on balance, we continue to believe housing activity will continue to slow. While we had predicted a modest rebound in new home sales over the month, the new sales number came in well above our expectations and will cause an upgrade to our near-term forecast. However, the timing of this report coincides with the temporary summer pullback in mortgage rates, which briefly dipped below 5 percent at the beginning of August. This likely helped to drive this one-month surge in sales. Given that mortgage rates are now more than 100 basis points above what they were in early August (6.7 percent as of the latest Freddie Mac survey), we view this report as a one-month jump in an otherwise weakening new home sales trend that we expect to continue through the remainder of the year. Further, another pullback in pending home sales and rapidly decelerating year-over-year home price growth is supportive of our forecast for further slowing in housing.

Nathaniel Drake
Economic and Strategic Research Group
September 30, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.