Fed Chairman Jay Powell’s remarks at the very exclusive Jackson Hole Economic Symposium in August signaled the Fed’s forthcoming action to reduce rates, starting in September. But even before that, in a sign that homebuyers sensed what was coming, sales of new homes rose unexpectedly in July, following significant revisions in the previous month’s data. Sales of newly built, single-family homes in July rose 10.6 percent to a 739,000 seasonally adjusted annual rate from significant upward revisions in June, according to the latest data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales in July is up 5.6 percent from a year earlier. After the notably higher revisions for the May and June data, new home sales from January through July of 2024 are up 2.6 percent in 2024 compared to the same period in 2023.
As has been widely reported by the National Association of Homebuilders and in the popular business press, mortgage rates moved lower in July. The Census estimated gains for new home sales do not match recent industry survey data including the NAHB/Wells Fargo Housing Market Index, which showed weakness in the current sales index. A word of caution: The Census estimate of new home sales is often volatile and subject to revisions, and it is possible that the July estimate for sales will be revised lower next month. NAHB is forecasting gradual improvements for the home building sector as the Fed eases monetary policy and mortgage interest rates trend lower.
A new home sale occurs when a sales contract is signed, or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the July reading of 739,000 units is the number of homes that would sell if this pace continued for the next 12 months. New single-family home inventory in July ticked lower to a level of 462,000, down 1.1 percent from the previous month. Only 16.7 percent of inventory available for purchase consists of completed, ready-to-occupy homes (102,000), although this inventory component is up 44 percent from a year ago.
CALMING EFFECT
So the economic winds have portended what lies ahead: A return to normalcy for interest rates in the months ahead.
Powell affirmed widely-held expectations that officials will begin lowering borrowing costs next month, and making clear his intention to prevent further cooling in the labor market. No doubt the startling re-adjustment of the grossly overstated job counts by 818,000 had a huge influence on the Fed’s decision-making, and such a giant miss clearly pressed the case to start lowering rates.
“The time has come for policy to adjust,” Powell said in a speech during the annual economic conference in Jackson Hole. He went on to say the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. His most decisive signal yet that his inflation-fighting mission has been accomplished helped restore order to markets just a few weeks after weaker-than-expected labor data, among other things, triggered a mini-panic. Now the return to calm is creating new riches on Wall Street, as indexes see-saw near all-time highs.
Getting the Fed’s start date set and having many of the world’s big central banks paddling in the same direction removes some anxieties for investors. Officials from three of the world’s major central banks late last month signaled they are firmly on course to lower, or continue lowering, interest rates in the coming months. Still, tremendous uncertainty and risks remain, as neither Powell nor his counterparts offered much guidance on how quickly they intend to proceed in lowering rates over the next several months.
What is my bet? I’ll throw the dice and predict we are down 100 basis points, or 1 percent, by year end, which will be s shot in the arm to housing, commercial development, and capital equipment. We’ll see if I am right.