Navigating the Currents: Recent Developments in the U.S. Economy, Housing Market, and Mortgage Market
U.S. Economy: A Tale of Resilience and Transformation
The U.S. economy displayed remarkable resilience in the third quarter of 2023, clocking in a seasonally adjusted annualized rate (SAAR) of 4.9%. While this growth rate witnessed a slight dip compared to the second estimate, it remained the swiftest since the final quarter of 2021 and among the most robust in the past two decades. Consumption spending, the linchpin of economic growth, experienced a downward revision from 3.6% to 3.1% in the final estimate, primarily attributed to a decline in spending on services. However, residential investment, defying expectations, surged by an impressive 6.7% SAAR, marking an end to nine consecutive quarters of negative growth.
The labor market continued to shine brightly in 2023, defying predictions of a slowdown. The economy welcomed 216,000 new jobs in December, bringing the total jobs created in 2023 to a staggering 2.7 million. Although this figure fell short of the historic highs witnessed in 2021 and 2022, it remained remarkable considering the elevated interest rate environment. The unemployment rate held steady at 3.7% in December, mirroring the November 2023 figure, but it did edge up 0.3 percentage points over the course of the year.
However, signs of a softening labor market are beginning to emerge. The labor force participation rate and employment-to-population ratio both decreased by 0.3 percentage points over the month, settling at 62.5% and 60.1%, respectively. Downward revisions to job growth figures in October and November resulted in the lowest 3-month average job gain in the fourth quarter of 2023 since the third quarter of 2019, excluding the 2020 recession. This moderation in job growth is anticipated as employment approaches levels consistent with a balanced labor market.
Inflation, once a persistent thorn in the side of the economy, is gradually trending towards the Federal Reserve’s target rate of 2%. The Core Personal Consumption Expenditure (PCE) measure, the Fed’s preferred gauge of inflation, indicated a 3.2% year-over-year increase, marking the smallest annual rise since May 2021. While inflation is showing signs of moderation as the labor market normalizes, a resurgence in home prices and persistently high average hourly earnings growth, currently at 4.1% year-over-year, may prolong the journey towards the 2% target.
U.S. Housing Market: Navigating the Crossroads of Challenges and Opportunities
The housing market encountered headwinds in 2023, largely attributed to the rise in interest rates. The total annual home sales are projected to hit their lowest point since 2012, with total (existing and new) home sales reaching approximately 4.4 million units in November 2023, marking a 6.2% decline compared to November 2022. Existing home sales hovered around 4.1 million through November 2023, while new home sales averaged 666,000 in 2023, surpassing the 637,000 recorded in 2022.
However, a glimmer of hope emerged as interest rates embarked on a downward trajectory. The Housing Market Index, a gauge of homebuilder confidence, rebounded in December 2023 after a steady decline since August. While existing home sales showed signs of improvement in November, pending home sales remained subdued, indicating a 5.2% decrease year-over-year. The FHFA Purchase-Only Home Price Index revealed a 6.1% year-to-date increase in home prices as of October 2023, and the persistent inventory shortage may further intensify upward pressure on prices as more buyers enter the market.
U.S. Mortgage Market: Evolving Dynamics in the Lending Landscape
The mortgage market experienced a rollercoaster ride in 2023, with mortgage rates reaching 23-year highs in October. However, since late October, rates have embarked on a downward trend, fueled by expectations of rate cuts by the Federal Reserve and easing inflationary pressures. The average 30-year fixed-rate mortgage witnessed a significant drop of almost one percentage point from late October to mid-December, although it remained higher compared to the beginning of the year.
Mortgage activity, unfortunately, took a hit in 2023. Purchase applications declined by nearly 12%, and total applications dropped by 7%, despite a 15% surge in refinance applications. The convergence of tighter financial conditions and elevated overall interest rates has resulted in an increase in mortgage delinquency rates. Total mortgage delinquency rates rose from 3.37% in Q2 2023 to 3.62% in Q3 2023, with conventional, VA, and FHA loans all experiencing an uptick in delinquency rates. However, serious delinquency rates (90+ DQs) across the board decreased between Q2 and Q3, and foreclosure starts remained low compared to historical averages.
A Glimpse into the Future: Navigating Uncharted Waters
As we venture into 2024, the U.S. economy, housing market, and mortgage market stand at a crossroads. The economy is expected to continue expanding, albeit at a slower pace, while the labor market is likely to remain tight, potentially contributing to persistent inflationary pressures. The housing market may face continued challenges due to elevated mortgage rates, but a potential decline in rates could provide some relief. The mortgage market is anticipated to remain volatile, influenced by the interplay of economic conditions, interest rates, and government policies.
In this dynamic landscape, it is crucial for stakeholders across the board to remain vigilant, adaptable, and informed. Homebuyers should carefully consider their financial situation and long-term goals before making purchasing decisions, while homeowners may explore refinancing opportunities to secure more favorable rates. Lenders must stay abreast of changing market conditions and adjust their lending strategies accordingly. Policymakers have a pivotal role to play in shaping the future of the housing and mortgage markets, ensuring that they remain accessible and sustainable for all.