Affordability Headwinds Stand to Keep a Ceiling on Activity
Source: Economics Group of Wells Fargo Bank, N.A.Summary
Housing Market Outlook Brightening, but Clouds Still Present
The adverse impacts of higher mortgage rates and increased home prices continue to reverberate across the housing market. The U.S. economy is still expanding, but home sales remain in a deep lull reminiscent of the aftermath of the Great Recession. A dip in mortgage rates as the Federal Reserve pivots to a less restrictive stance of monetary policy could improve affordability and provide a needed jolt to the residential sector. The recent National Association of Realtors settlement changing the way that buyer-agent commissions are set may also incentivize some buyers and sellers to emerge from the sidelines. A full-fledged rebound in home sales still seems improbable given affordability conditions are likely to remain unfavorable as a result of strong underlying demand, scarce supply and a less-robust macroeconomic environment.
Mortgage Rates Have Moved Lower
Prospects for the residential sector appear to be brightening. Easing inflation and cooling labor market conditions have increased the likelihood that a monetary policy pivot from the Federal Reserve soon will be forthcoming. Although we have been expecting the Fed to move forward with rate cuts this year for quite some time, we now believe that recent signs of the labor market losing steam will lead to a more decisive pace of monetary easing in order to prevent a recession. July’s employment report was weak across the board, and the unexpectedly sharp uptick in the unemployment rate to 4.3% triggered the Sahm Recession Rule. We still believe a downturn can be avoided, but the FOMC will need to move quickly in order to do so. We expect the FOMC will implement the first rate cut this September and follow that with cuts every meeting until mid-next year.