The housing market remains characterized by declining year-over-year sales for existing homes and improving new-home sales in 2023. In addition, high home prices and elevated mortgage rates continue to challenge affordability, while the Federal Reserve remains committed to cooling the economy and returning inflation to its target rate of 2%.
To help sift through the array of data impacting the housing market and overall economy, economists from Zonda, the NAHB, the National Association of Realtors (NAR), and Fannie Mae shared indicators and trends to watch closely through the remainder of 2023.
Resale Inventory
Zonda chief economist Ali Wolf says resale inventory remains the most important indicator to watch to gauge the health of the housing market.
Mortgage rates hovering around 7% in the current market, coupled with homeowners who purchased during periods of historic-low interest rates, have tightened resale inventory and continued to shift market share to home builders. The new-home share of the housing market has shifted from typical levels between 10% and 15% to nearly a third of the market since the beginning of 2023.
The number of homes for sale in the existing market is “roughly half” of what it should be, according to NAHB chief economist Robert Dietz.
NAR deputy chief economist and vice president of research Jessica Lautz says during July existing-home inventory was at its lowest levels since the organization began tracking data 41 years ago.
“Inventory that stays depressed will keep prices firm and will allow builders to continue to gain market share, but it will also continue the market dysfunction we are experiencing today,” Wolf says. “Rising inventory as a result of lower mortgage rates freeing up many frozen by the lock-in effect can help increase mobility and return some balance to the market.”
According to Wolf, demand has proven to be stronger than expected despite headwinds from prices, inflation, overall uncertainty, and elevated rates. Demand levels seem elevated, though, due to the historic levels of resale inventory, she says.
"My key takeaway from the elevated mortgage rates is that when people want or need to buy and they can afford to do so, they are OK taking on the higher rate today with the hope of refinancing in the future,” Wolf adds.
However, because of limited inventory in the existing-home market, Lautz says there are typically more than three offers for every existing home listed, and a third of homes are moving above list prices.
“We’re seeing rates in the high 6% and near 7% range; that’s very difficult for a buyer, for a first-time home buyer especially, to compete against other buyers in the marketplace who could have all cash [or] who could have a substantial down payment,” Lautz says. “If there’s a multiple bid situation, the first-time home buyer is going to be edged out [by all-cash, second-home, and investor buyers].”
Due to elevated competition in the existing market, many buyers are entering the new-construction market. Anecdotally, Lautz and Fannie Mae deputy chief economist and vice president Mark Palim say would-be first-time home buyers are favoring the new-home market in favor of the existing-home market. While first-time home buyers have historically represented 40% of the existing-housing market, Lautz says in June first-time buyers represented 27% of the market.
Wolf says builders continue to have an advantage in the housing market given incentives, quick move-in supply, and compressed new-versus-existing home price premium.
“You cannot sell what’s not on the market, so existing-home sales are down roughly 20%, and the beneficiary is new construction,” says NAHB chief economist Robert Dietz. “Builders are ultimately going to have to pick up the pace of single-family permitting in starts in order to build out some of the better-than-expected sales data.”
In addition to inventory, Wolf says price changes, housing starts, and mortgage rates will remain key indicators to watch as prices can give insight to builder confidence, home sales, and access to capital. Mortgage rates will continue to inform affordability conditions and investor sentiment.
Inflation and the Job Market
After highlighting the labor market and inflation as two significant indicators to watch in the spring, Wolf says both remain important to gauge trends in the broader economy.
Dietz says recently the Federal Reserve has remained focused on the non-housing source of inflation, including service inflation. While inflation has come down from its peak levels near 9%, it still remains elevated above the Federal Reserve’s target rate of 2%. Doug Duncan, senior vice president and chief economist for Fannie Mae, says the housing component of inflation remains elevated, but the expectation is the lagging indicator will come down in the coming months.
“Inflation and the labor market are the key indicators for the Federal Reserve. By watching these, we can get a sense of what the Fed’s next steps might be and extrapolate the impact on the wider economy,” Wolf says.
In the labor market, Dietz says the Federal Reserve’s tightening efforts are not likely to have as big an impact on the unemployment rate as prior cycles.
“It looks like a lot of the effects of tightening by the Fed on the labor market have mostly slowed the count of openings—reducing some of the short-term effects of the labor shortage,” Dietz says. “We’ve also seen a decline in weekly hours worked, which may also be consistent with employers holding onto workers even if there’s less activity for them to undertake.”
In addition to unemployment, Duncan says wage rates and income levels can provide important insight into the overall economy when the unemployment rate is largely unchanged.
“Businesses that are suffering declines may cut bonuses, or they may cut the hours that workers work. In neither of those cases did you lose your job, but your income is truncated,” Duncan says. “That does create some stress for households that are attempting to purchase a home or are trying to maintain their home.”
10-Year Treasury, Credit, and Auto Loans
The 10-year treasury bond remains an important indicator to track, according to Dietz, as it can provide builders with insight on both the current economy as well as investor expectations for the economy.
Palim and Dietz agree that the banking sector is another important factor to watch in the coming months.
Palim says Fannie Mae is closely watching regional and community banks, in particular, as both are “critical components” of lending for small- and medium-sized builders as well as to the overall land development and acquisition cycle.
Dietz says while commentary that private builders have been “shut out” of the capital market has been exaggerated, the cost of financing has gone up since the spring and is having some impact on supply-side conditions.
Beyond supply-side indicators, including lumber market prices and labor market conditions, Dietz says a “wild-card” indicator to watch in the coming months is auto loan conditions.
“If we start to see an uptick in delinquencies and outright failures on auto loans, that could be a warning sign if the economy were to slow more than most forecasters expect it to,” Dietz says. “That would be an indication that households are having trouble paying their existing bills, and we could see some reduction of housing demand [as a result].”
