* The Fed’s Housing Market ‘Reset’ Has us in a Housing Correction. Here’s What to Expect Next. Through the first 24 months of the pandemic, U.S. home prices soared 38.5%. As the pandemic housing boom raged along, it pushed up prices across the economy. Elevated homebuilding levels – which hit a 15-year high during the pandemic – put upward price pressure on everything from windows to lumber while also adding stress to an already stressed global supply chain. That’s why the central bank, who has a mandate from Congress to tackle runaway inflation, has targeted the U.S. housing market. How? It put immense upward pressure on mortgage rates. While the Fed doesn’t directly set mortgage rates, it has the levers to see that financial markets do so. Once the Fed made it clear this year what lay ahead for monetary tightening, markets quickly pushed the average 30-year fixed mortgage rate above 5%. In June, Fed Chair Jerome Powell finally made it clear this is all by design. Powell would like to see the U.S. housing market return to a more balanced state. In his own words, he calls it a “reset.” To find evidence of the accelerated rate of cooling, just look at inventory data. Among the nation’s 100 largest housing markets, the median market saw inventory rise 1% between January and April, according to Fortune‘s analysis of realtor.com data. Among those same 100 largest housing markets, the median market saw inventory rise 50% between April and June. While inventory is rising quickly, it still remains far below pre-pandemic levels: Among the 917 regional housing markets measured by realtor.com, 601 markets are still at least 50% below their pre-pandemic level. Across the country, the U.S. housing market is slowing. Mortgage applications are down 17% on a year-over-year basis, according to the Mortgage Bankers Association.
* Rates Are Applying The Brakes to Appreciation. The two-year explosion in home prices appears to be cooling a bit. Black Knight says annual appreciation was down in May for the second straight month. The company, in its May Mortgage Monitor, notes that annual price growth retreated from 20.4 percent in April to 19.3 percent in May. That was the largest negative correction in a single month since 2006. That still left prices up 1.5 percent from April to May – nearly twice the average historic acceleration for that month – and a gain of 10.8 percent during the first five months of the year. According to Black Knight Data & Analytics President Ben Graboske, “…while any talk of home values and 2006 might set off alarm bells for some, the truth is that price gains would need to see deceleration at this rate for more than 12 months just to get us back to a ‘normal’ 3-5% annual growth rate. One of the principal drivers of home prices since even before the pandemic has been the lack of homes for sale. There is some hope on that front. May saw the largest jump in housing inventory in the past five years, 107,000 units. Still, the inventory remains at a 60 percent deficit, some 770,000 fewer properties on the market than would be typical.
* Solid Job Gains in June. Despite interest rate hikes, job growth remained solid in June. Total nonfarm payroll employment increased by 372,000 and the unemployment rate remained at 3.6% in June. Construction industry employment (both residential and non-residential) totaled 7.7 million and has exceeded its February 2020 level. In the first half of 2022, more than 2.7 million jobs were created, and monthly employment growth averaged 457,000 per month. As of June 2022, total nonfarm employment is 524,000 lower than its pre-pandemic level in February 2020, almost fully recovered from the COVID-19 pandemic. Meanwhile, the unemployment rate remained at 3.6% for the fourth straight month. It was 11.1 percentage points lower than its recent high of 14.7% in April 2020 and 0.1 percentage point higher than the rate in February 2020. In June, the unemployment rate for construction workers declined by 0.5 percentage points to 3.6% on a seasonally adjusted basis. It marks the lowest rate since May 2019.