Don't Sweat a Housing Crash as Long as Wages Are Rising

The housing market has been searching for balance ever since mortgage rates rose above 5% at the end of April. Demand has fallen, and in response, homebuilders have cut back on housing starts. The torrid price appreciation of the past two years has ground to a halt, with the June S&P CoreLogic Case-Shiller index showing home prices grew at the slowest rate in two years.

In his speech at the Jackson Hole Economic Symposium last week, Federal Reserve Chairman Jerome Powell presented an economic outlook that suggests interest rates will be elevated for a sustained period of time, dashing the hopes that a pivot in monetary policy could lead to lower mortgage rates in 2023. Instead, the path to more normalized levels of housing market activity will depend on gains in worker incomes.

The tricky part about assessing the reasons for the plunge in buyer activity since April is that it’s due to both reduced affordability — a function of home prices and mortgage rates — as well as skittish homebuyer sentiment. That skittishness was particularly acute in June, when fears of inflation and recession reached a fever pitch.

In their quarterly earnings conference call last week, the luxury homebuilder Toll Brothers spoke to the latter dynamic, noting that traffic to their website and communities plunged in June. But Toll decided not to meaningfully increase buyer incentives, feeling that buyers had decided to take a pause to assess the state of the economy and housing market, and modest incentives wouldn’t lead to increased sales. Traffic has improved in July and August, which has made them more willing to offer incentives since they think it’s now more likely to lead to an improvement in transactions.