Just how badly did the housing market end 2022?
That may be clear this week as a bevy of reports for December are released that will shed some light on the housing market: the number of new permits issued and homes on which construction has begun, the confidence of homebuilders and sales of existing homes.
The steep run-up in mortgage rates last year put a damper on home sales, down 35% from a year ago as of November. Builder confidence has declined every month in 2022 and new home starts and permits also slid to a 2 1/2 year low last month. None of those indicators are likely to have improved in December when they are reported on Wednesday and Thursday, respectively.
Housing has been the sector most affected by the Federal Reserve’s campaign to raise interest rates to ward off inflation. But with inflation slowing somewhat – the consumer price index hit 6.5% annually in December, down from summer’s 9.1% peak – there is hope that mortgage rates will decline and the market will show signs of life again in the spring.
“There is pent-up demand in the housing market, as many prospective buyers have been sitting on the sidelines over the past few months,” Bright MLS Chief Economist Lisa Sturtevant said last week. “With less pressure on the Federal Reserve, mortgage rates have likely hit their peak for the cycle and will now start to come down slowly.”
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“Both buyers and sellers will begin to accept the “new normal” of the 2023 housing market – which includes mortgage rates around 6% – and we should see more activity from both buyers and sellers as we head into the spring,” Sturtevant added.
Another read on inflation is due Wednesday, with the release of the producer price index for December. Projections for this measure of wholesale inflation call for both a month over month decline of 0.1% and a drop in the annual rate to 6.8% from 7.4%.
Retail sales data also out Wednesday will likely show a monthly drop in December as consumers face higher borrowing costs and a slowing economy. But the consumer has remained resilient so far and improving inflation has resulted in an increase in consumer sentiment.
That has led to some pullback from recession forecasts from the major financial services firms, with some now looking to the latter part of 2023 before a downturn arrives or projecting only a mild contraction in economic activity.
“Falling inflation boosts consumers’ real incomes and bodes well for household balance sheets and ultimately spending,” BCA Research wrote Tuesday morning. “However, it may be too late to avert recession. Elevated policy rates are a restraint on economic activity and central banks are unlikely to pivot to rate cuts without a sharp deterioration in economic conditions”
Rounding out the week will be Friday’s report on existing home sales for December. Those are expected to come in down 3.4% for the month and at an annual rate of 3.95 million, compared to 4.09 million a month earlier.
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