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Record Low Mortgage Rates Boost Housing Market as Economy Shows Signs of Recovery – October 2023 Outlook

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“Riding the wave of economic recovery, the housing and mortgage market is poised for a breakthrough as October 2023 reveals promising trends and lucrative opportunities for both buyers and sellers.”

Recent developments in the U.S. economy show that it continues to expand. The Bureau of Economic Analysis (BEA) estimates that the real Gross Domestic Product (GDP) growth for the second quarter of 2023 was 2.1%, while the first quarter growth was revised upwards to 2.2%. Although the growth rate of personal consumption expenditures declined from 3.8% in the first quarter to 0.8% in the second quarter, there was an increase in investment expenditures, which rose from -9.0% to 5.2%. This growth rate is higher than the Congressional Budget Office’s estimate of real potential GDP growth.

The labor market in the U.S. remains strong, with 336,000 jobs added in September 2023, according to the Bureau of Labor Statistics (BLS). This is above the average of the previous 12 months, which was 267,000. Job growth was led by sectors such as leisure and hospitality, government, health care, professional, scientific, and technical services, and social assistance. Additionally, the unemployment rate remained unchanged at 3.8% in September, with 6.4 million unemployed persons. The labor force participation rate and employment-population ratio also remained unchanged. The ratio of job openings to unemployed stands at 1.5.

In terms of inflation, price pressures seem to be abating, with the August reading coming in below expectations. However, energy prices have been on the rise, posing upside risks to future inflation. Core inflation, excluding food and energy, increased by 0.1% month-over-month. The year-over-year core PCE price inflation was 3.9%, the lowest annual increase since mid-2021. Prices for goods and services increased, with goods inflation at 0.8% and services inflation at 0.2%. The “super core” inflation measure, which excludes energy and housing, remained flat in August and increased by 4.2% year-over-year.

Turning to the U.S. housing market, interest rates have risen above 7%, reaching their highest level since the early 2000s. As a result, more homebuyers are delaying their purchases, waiting for more favorable conditions. Existing home sales were down 15.3% from August 2022, but the median sale price of existing homes increased by 3.9%. The lack of inventory for existing homes is leading more buyers to consider new homes. New home sales for August were up 5.8% from the previous year, with a decrease in the median sale price. Overall, total home sales were down 12.8% from last August.

Home builders are becoming less confident due to higher interest rates and supply side constraints. The Housing Market Index, which measures builder confidence, fell across all three components. To drive more sales, builders are offering incentives and decreasing prices. Housing starts in August fell by 14.8% compared to the previous year and are down 4.3% from the beginning of this year. The Pending Home Sales Index, a forward-looking measure of home purchases, is also down by 18.7% year over year.

In the U.S. mortgage market, Treasury yields have reached their highest levels in 16 years, affecting mortgage rates. The average 30-year fixed-rate mortgage increased to 7.49%, the highest since December 2000. As a result, mortgage demand has decreased. Mortgage delinquencies have also shown a slight uptick, with loans 30 or more days past due increasing to 2.04% in August 2023. Serious delinquencies increased to 0.59%.

Looking ahead, the outlook for the U.S. economy is clouded by rising interest rates, higher gasoline prices, and geopolitical developments. Consumer confidence has been affected, leading to a potential slowdown in consumer spending. However, U.S. consumers have shown resilience in the past and have strong balance sheets. Economic growth is expected to slow at the end of this year and remain muted in 2024, with gradual moderation in inflation. Mortgage rates are likely to remain elevated, but a reduction in bond market volatility may narrow the spread between Treasuries and mortgage rates.

The challenges presented by high mortgage rates have impacted homebuyers, leading to fewer buyers and sellers entering the housing market. This has affected both demand and supply. Mortgage origination volume is expected to remain muted, with the refinance market being significantly impacted by rising rates. Despite forecasted home price increases, low sales volumes will offset the positive impact on origination volumes. Overall, total mortgage originations are expected to remain flat for the rest of the year, with modest growth in 2024.

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