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The Housing Market Has Become a “Significant Headwind” for the Economy of the United States

The once-scorching real estate market is currently experiencing a precipitous decline in activity.

The sector is showing signs of beginning to cool off, according to a deluge of new economic statistics that was published this week:

The sentiment of homebuilders toward the industry has plummeted to its lowest level in two years, and buyers are withdrawing from the market as they cancel home sales at the fastest pace since the year 2020. Additionally, builders are rethinking construction as a result of these trends.

According to Bill Adams, chief economist of Comerica Bank, the housing market has “obviously gone from being a tailwind to a headwind for the United States economy.” It will likely hurt real GDP growth during the following year.

The combination of excruciatingly high inflation and growing borrowing prices has proven to be a fatal one for the home market, which has caused prospective purchasers to reduce the amount of money they are spending.

As buyers pulled back from the market, the number of home sales that were cancelled increased dramatically in July, reaching a new high for the past two years.

According to a new analysis that was published on Tuesday by Redfin, approximately 63,000 home purchase agreements were terminated in July.

This represents approximately 16% of the homes that went into contract during that month. This represents the highest percentage in the past more than two years, and it is an increase from the 15% of agreements that fell through in June.

When compared, the percentage of cancelled home orders was somewhere about 12.5% just one year earlier.

Anxiety among buyers about the more bleak economic picture as a result of the Federal Reserve’s plan to hike interest rates at the fastest pace in decades, which risks the possibility of a recession, is one of the primary causes for the increase in the number of cancellations.

According to Heather Kruayai, a real estate agent with Redfin headquartered in Jacksonville, Florida, “Buyers are also apprehensive since they are scared that a future recession will force property values to plummet.”

“They don’t want to find themselves in a situation in which they acquire a property, and it’s worth $200,000 less in two years, so some of them are electing to wait in the hopes of purchasing when prices are lower.”

In addition to this, the mood of homebuilders towards the current state of the housing market plummeted in August to its lowest point since the start of the COVID-19 pandemic.

The National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, dropped for the eighth consecutive month to 49, marking the worst stretch for the housing market since the 2008 financial crisis. The index measures the pulse of the market for newly-built single-family homes.

The gauge has not reached negative territory since a brief but dramatic decline in May 2020; any reading above 50 is deemed good.


Since it reached its peak of 80 just one year ago, the index has experienced a significant decline. It reached a 35-year high of 90 in November 2020, buoyed by record-low interest rates at the same time that American homebuyers – flush with cash and eager for more space during the pandemic – began flocking to the suburbs. This caused the index to reach its highest point in 35 years.

According to Robert Dietz, chief economist for the National Association of Home Builders (NAHB), “a tighter monetary policy from the Federal Reserve and consistently elevated building prices have brought about a housing crisis.”

As a result of rising mortgage rates, an increasing number of prospective buyers pulling out of deals, and sales reaching their lowest level in the past two years, builders have been increasingly reluctant to construct new houses, which has the effect of maintaining high prices.

The Commerce Department reported this week that new home construction in the United States fell for the third consecutive month in July, with housing starts falling 9.6% last month to an annual rate of 1.446 million units, the lowest level since February 2021. This was the lowest level since the beginning of the year.

Applications to build, which measure future construction, slowed to an annual rate of 1.67 million units, which is also the lowest since September. This rate is also the lowest it has been since the beginning of the year.

According to Adams, “the recent spike in mortgage rates and widespread worries of recession is impacting heavily on housing development.”

“Even though home prices most certainly continued to rise higher in July (most house price indices for the month haven’t been announced yet), activity in the housing market is moving dramatically lower.” (While most house price indices for the month haven’t been issued yet.)

As a result of the Federal Reserve’s recent actions to tighten monetary policy at the quickest pace in three decades, the interest rate-sensitive housing market has begun to experience noticeable cooling in recent months.

The decision-makers have already approved a rate increase of 75 basis points in both June and July, and they have given indications that they will likely consider yet another massive rate hike when they get together in September.

According to new information provided by mortgage lender Freddie Mac, the standard rate for a loan with a term of thirty years and a fixed interest rate reached 5.22% for the week that ended on August 11. The interest rate was only 2.86% a year ago, thus this is a big increase from that point in time.

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According to a statement made by Tuan Nguyen, a U.S. economist working with RSM, “We should expect the housing market to decrease further given that the Fed is continuing to stomp on the pedal in terms of interest rates.” Given that we are still a significant distance from attaining the Fed’s target level of inflation, it is too soon to make any predictions regarding the timing of a future Fed rate cut.

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