As we suspected, the most consequential thing that came out of the September Fed Meeting wasn't a change to monetary policy or short-term interest rates, but rather what Fed members expressed in their updated Summary of Economic Projections (SEP).
Already elevated from a strong economy and a glut of bond supply over the summer, bond yields rose again with the revised forecast, kicking mortgage rates upward. Thirty-year fixed mortgage rates have already spent the last six weeks over the 7% mark, and the new bump higher ensures that rates will be over seven percent for seven weeks, and probably longer. This is the longest such string for rates above 7% since the spring and summer of 2001.
It's not as though mortgage rates have never been this high before; they have, and on many occasions. However, most potential homebuyers in the market today were likely children the last time such a spate of high rates were present, and so they have no recollection of such market conditions.
On the topic of comparisons between then and now, well, today's a rather different ballgame. Yes, rates were in the sevens back in 2001; however, the median price for an existing home sold in September 2001 was $146,900 -- while the median household income was $44,228 per the census bureau. A rough, back-of-the envelope calculation shows that the median home price was about 3.32 times median income, a relatively affordable level.
Today, 7%+ interest rates are being applied against a median home price of $407,100, challenging affordability even though the median family income (2022 estimate) is $74,755. Compared to 2001, home prices are about 277% higher now than then, while income is only about 69% higher. The median price of a home at the moment is about 5.44 times the median income, a rather unaffordable multiple.
Of course, these higher interest rates are reflected in damped home sales activity. Existing home sales retreated by 0.7% in August, easing to a 4.04 million (annualized) sales pace. August's sales tally is the result of buyer demand in late June and July; the spring homebuying season was sluggish and the spill over into summer was no better. Since July, mortgage rates have only legged higher, something sure to further trim demand. Home prices, though, continue to be well supported, as there is still sufficient buyer demand amid limited supply as to keep them firm. Inventories of homes for sale remained at 3.3 months of supply at the current sales pace, but this masks the fact that the actual number of homes available to buy (1.1 million) is 14.1% below year-ago levels, according to the National Association of Realtors.
Tight inventories of existing homes for sale have pushed some buyers toward the new construction market. That said the market is of course also affected by uncertainty and higher financing costs, although builder incentives can help offset these to some degree. Home builder moods are starting to reflect the change of seasons and in market conditions, and the Housing Market Index from the National Association of Home Builders downshifted in September.
Builders may have a bit more of the blues in September because building activity slowed in August. Housing starts for August declined by 11.3%, sliding to a 1.283 million (annual) rate of construction initiation. This was the slowest pace since June 2020, but that was a pandemic distortion; the present rate is likely more akin to that seen in July 2019. Starts of single-family homes held up well enough, with only a 4.3% decline to a 941,000 annual clip, while multifamily construction dropped by 26.3% to just a 342,000 annual rate. This decline -- and the diminished outlook for future sales conditions tracked in the HMI -- seem to belie underlying enthusiasm for the future, as building permits for houses powered higher, rising 6.9% to a 1.543 million annual rate This includes a modest 2% uptick for expected single-family construction but a significant 15.8% increase in permits for multi-family projects.
The index of Leading Economic Indicators from the Conference Board continues to point to an impending recession. For August, this indicator posted a reading of -0.4, a seventeenth consecutive monthly decline, and the longest such string of poor readings since the period leading up to the Great Recession. This indicator has never run a negative string for so long without a recession appearing, but so far, there seems to be few signs that one is just around the corner. If anything, economic growth appears to have accelerated over the last few months, and the most recent update from the Atlanta Fed's GDPNow model pegs economic growth at a 4.9% rate though September 19. While we'll get a final revision for the second quarter next week, GDP growth was last seen running at a 2.1% rate for that period.
Perhaps it was a message of "get a deal in place before the Fed meets" or a mild burst of pent-up demand after the summer season and the Labor Day holiday, but mortgage applications managed to rise by 5.4% in the week of September 15, according to the Mortgage Bankers Association. This came despite mortgage rates edging higher, and the overall lift was powered by a surprising 13.2% increase in applications to refinance existing mortgages; those to purchase homes also managed a milder 2.3% gain, making it three positives for purchases in the last four weeks.
Given the renewed upward push for mortgage rates, the increase in mortgage applications seems unlikely to be duplicated next week. The reaction after the Fed's shift in outlook lifted the yield on the influential 10-year Treasury by about 18 basis points by late Thursday, but it managed to settle back a little by the close of business Friday. Still, the remaining increase should be enough to push mortgage rates to fresh highs next week, and we'll see rates above 7% for a 7th consecutive week. We'll project the increase to be one of perhaps seven or eight basis points in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac when the next update comes Thursday at noon.
