Housing Market: New Housing Constructs Slow, Mortgage Rates Rise

The economy continues to grow slowly, but the housing market is stagnating as mortgage rates rise. The Labor Department said on Thursday that the number of Americans filing first-time applications for unemployment benefits declined by 3,000 to 229,000 last week. While economists expected a figure closer to 220,000.

Even though the labor market is still robust, any signs that it might be slowing down would be welcomed by the Federal Reserve and businesses alike, since a more even supply and demand for workers would reduce inflationary pressure.

With annual consumer inflation now running at 8.6%, the Fed hiked interest rates by 75 basis points on Wednesday. According to Fed Chairman Jerome Powell, one reason the economy can sustain higher interest rates is that there is a strong labor market out there.

More than 400,000 new jobs have been added each month so far this year, which is higher than most economists believe is necessary to keep the labor market functioning normally. In the meantime, the unemployment rate is 3.6 percent, just below where it was before the pandemic. Powell stated that he believed the rate might increase to beyond 4% while still being deemed good historically.

A news conference following the Fed’s announcement by Powell stated that “Our objective really is to bring inflation down to 2% while the labor market remains strong”. But he conceded that other circumstances were beyond his control, such as the conflict in Ukraine, which is causing food and energy prices to skyrocket around the world.”

“I think that what’s becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not.” Powell remarked.

Despite this, economists are doubtful that Powell can do so without causing harm to the economy.

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On Wednesday, ING’s international economist and regional head of research in the Americas, James Knightley and Padhraic Garvey stated that “To get inflation lower quickly we ideally need the supply-side capacity of the economy to better balance with strong demand,” respectively.

“However, the geopolitical backdrop, with Covid containment measures in Asia, and the lack of worker supply in the US suggests this isn’t going to happen soon,” they added. “Consequently, inflation is likely to be slow and sticky on its descent, thereby putting the onus on the Fed to weaken demand via higher interest rates.”

After the Federal Reserve raised interest rates by 25 basis points on Thursday, the Bank of England did the same, signaling that the UK’s inflation rate could rise to 11 percent this year. Dow Jones futures were down over 500 points in premarket trade because of the markets’ reaction to the Fed’s decision and heightening fears of a recession. The Dow Jones Industrial Average had gained more than 300 points on Wednesday, but it has since been on a downward trend.

Wells Fargo Securities Chief Economist Jay Bryson stated on Wednesday that “we are changing our base case forecast for next year from an economic soft landing to a mild recession starting in mid-2023,” he said. I think inflation is going to be a problem for a long time. Real income is being eroded by high inflation, which is projected to weigh on the increase of consumer expenditure in the coming quarters.

Nevertheless, Bryson predicts that any slump “will be more or less equivalent in magnitude and duration to the downturn of 1990-1991. That recession lasted for two quarters with a peak-to-trough decline in real GDP of 1.4%.”

There are indicators that increased interest rates, as inflation starts to take its toll on the economy. Retail sales declined by 0.3% in May, despite a rise in inflation-related purchases of fuel and food. Mortgage rates, however, have risen by more than two percentage points in recent months, slowing the housing market.

Following a drop in April, the Census Bureau reported on Thursday a decrease in home starts of 14.4% in May. The number of new homes being built is now 3.5% lower than it was a year ago. From a month earlier, permits for new construction fell by 7 percent.

Confidence in the building business has waned as a result of uncertainty about rapidly shifting economic conditions, as well as supply chain concerns, according to RCLCO Real Estate Consulting’s Kelly Mangold.

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