Economic Developments - September 2024

Labor Market Data Caused a Growth Scare, but Continued Expansion Still Expected

With inflation continuing to move toward the Federal Reserve's target and most labor market data softening, we believe economic growth is in the process of downshifting, even though consumer spending to date has remained more resilient than previously expected. Fed commentary has stated that risks to their dual mandate – maximum employment and stable prices – are now better balanced and a rate-cutting cycle is imminent.

The Consumer Price Index (CPI) fell four-tenths to 2.5 percent compared to a year ago in August, a new cycle low and roughly even with pre-pandemic readings. While core inflation remains somewhat stickier, 2.3 percentage points of the 3.2 percent year-over-year increase in core prices is due to lagged shelter prices, which are widely expected to converge to lower measures of rents on newly signed leases over time. On the employment side, the 142,000 increase in payroll employment in August represented an improvement from July's downwardly revised estimate of 89,000 jobs added, but the three-month moving average of job gains declined to just 116,000, the lowest level since the start of the labor market recovery following the pandemic. The unemployment rate fell back one-tenth, as expected, to 4.2 percent due in part to a reversal in those reporting temporary unemployment in July, but it remains five-tenths higher than in January. Data from the July Job Openings and Labor Turnover Survey (JOLTS) also showed a slowing labor market as job openings declined to their lowest level since February 2021, layoffs moved up to their highest level since March 2023, and the quits rate remained below its pre-pandemic level. Varying business surveys also show softening in hiring.

Despite this, real Personal Consumption Expenditures (PCE) have remained robust to date. Second quarter PCE was revised upward by six-tenths to a 2.9 percent annualized gain in the second release of GDP and monthly data showed another 0.4 percent increase in real consumption in July. As has been the case over the past half-year, the strong consumption occurred without a corresponding large increase in real disposable personal income, which grew at just a 0.9 percent annualized rate in the second quarter. This dynamic has pushed the saving rate down to just 2.9 percent in July, the lowest level since June 2022 and several percentage points below its pre-pandemic level. We continue to believe that the current rate of spending relative to incomes is unsustainable, and therefore expect consumption will slow by the end of the year. However, the exact timing of this downshift presents risk to our forecast.

On balance, our growth forecast is largely unchanged compared to last month. While we have upgraded our third quarter growth expectations due to stronger base effects from the higher second quarter reading, we continue to expect that growth will slow in line with business surveys and signs of a weaker labor market. We now forecast 75 basis points of fed funds rate cuts by the end of the year, spread evenly between the Fed’s three remaining meetings. We anticipate that rates will continue to decline through next year and, with a lag, will provide a boost to the economy as monetary policy transitions from a restrictive to a neutral stance. We expect GDP growth will return to roughly its long-term potential by the end of 2025.

Rising Regional Variation in Housing Market as Sales Fail to Respond to Easing Mortgage Rates

Existing home sales continue to be weak despite the pullback in mortgage rates over the past few months. While existing home sales edged upward by 1.3 percent in July, the pace remained at a subdued 3.95 million units annualized, near the cycle low. Furthermore, pending home sales, which lead sales on average by 30-45 days, fell back by 5.5 percent in July, pointing to likely further weakness in August and September. Higher frequency data such as purchase mortgage applications and Redfin’s Home Search Demand Index, also show little signs of a pickup in sales. Therefore, we have downwardly revised our near-term existing home sales forecast and now expect existing home sales to average only around 4 million annualized units for the remainder of 2024 and for the year to be slightly below the 2023 sales pace.

Despite an easing in mortgage rates, the lock-in effect remains strong as the bulk of existing mortgage borrowers still have notes with rates well below current market rates. This is likely continuing to keep many would-be homebuyers and home-sellers on the sidelines. Based on Fannie Mae’s book of outstanding single-family mortgage loans, as of June 30, 2024, approximately 80 percent of 30-year fixed rate loans had note rates at least 100 basis points below the average 30-year fixed-rate mortgage rate of 6.20 percent, as of September 12, 2024, as measured by Freddie Mac’s weekly mortgage rate survey. More than 60 percent had a note rate greater than 200 basis points below the current average market rate . Affordability constraints also continue to be a challenge aside from any lock-in disincentives.

On a national basis, the inventory of homes listed for sale continues to nudge upward. According to the National Association of REALTORS®, the number of homes on the market at the end of July was up 19.8 percent from a year prior. However, this rise in homes on the market is not occurring because of a significant increase in new listings. Rather, the pace of sales has been so weak that new listings on average are remaining on the market longer. .

The rise in the inventories of homes for sale has not been uniform across geographies, and we believe this geographic variation is a significant factor as to why home sales have not responded meaningfully to the pullback in mortgage rates. Most of the rise in homes for sale have occurred in Sun Belt and a few Mountain West states. Some of these states now have for-sale inventories near or even above what was available pre-pandemic at the end of 2019. However, most of the Northeast and Midwest continue to have near cycle lows of homes available for sale.

While there are likely many factors driving this divergence, an examination of the states driving the rise in homes for sale shows that these they tend to have two characteristics in common. First, the cumulative home price gains since the pandemic have tended to be some of the largest, creating a larger relative shock to affordability for residents in these states. Second, these states have had comparatively strong new home construction since the pandemic, causing existing home listings to face greater competition from homebuilders offering new homes. We interpret the lack of a sales pick up in these states, despite the increase in for-sale listings, as meaning there are no longer enough borrowers able or willing to transact at current price points and mortgage rates, whether because affordability is now binding for the marginal buyer, because new home sales are more attractive, or some other reason, such as concern about availability and cost of insurance. To date, the decline in mortgage rates has not helped affordability enough to generate sales in these markets. This can be seen in the scatterplot chart above, where states in the top right quadrant are those with comparatively high recent homebuilding and comparative large post-pandemic home price gains. These states are driving the bulk of the national rise in active for-sale listings of existing homes.

In contrast, inventories remain subdued in most other states. Listings being put onto the market are continuing to find adequate buyer interest either because the relative affordability shock in recent years has been comparatively small (as is the case in much of the Midwest), and/or there has been limited new home construction as an alternative (as is the case in the smaller states in the Northeast, which has also seen some of the strongest home price gains as demand shifted away from the New York and Boston metro areas). These dynamics appear to have affected household attitudes. In recent months there has been a widening regional divergence of consumer sentiment on whether it’s a “good time to sell” in Fannie Mae’s Home Purchase Sentiment Index®. Respondents in the Northeast are increasingly saying it’s a good time to sell, perhaps indicating the ongoing tight inventories and shorter time on the market, while respondents in the South have become more downbeat about selling conditions.

As time progresses, more households will likely initiate moves because they can’t put off various life events any further; however, as long as the lock-in effect remains as strong as it currently is, we do not expect a large increase in transactions broadly. For the states that are seeing rises in active inventories, we expect a combination of easing mortgage rates and soft home price growth relative to income growth will be needed before existing home sales begin to meaningfully rise, as affordability constraints appear to be a large driver. While it will likely take some time before sales recover to a more “normal” pace, we forecast existing home sales to begin moving up in a meaningful way in mid-2025 as mortgage rates ease further and home price growth decelerates, as shown in our forecast. While we have softened our new home construction forecast over the past couple months, we continue to expect comparatively robust activity in the new home sales market as elevated existing home prices will continue to make new homes attractive, especially as homebuilders continue to offer concessions and rate buy downs.

Economic & Strategic Research (ESR) Group
September 15, 2024
For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR's Economic and Housing Weekly Notes.

Data sources for charts: Bureau of Labor Statistics, Bureau of Economic Analysis, Mortgage Bankers Association, Freddie Mac, Realtor.com, Federal Housing Finance Agency, US Postal Service, Census Bureau, Fannie Mae Home Purchase Sentiment Index

Opinions, analyses, estimates, forecasts, beliefs, and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, beliefs, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.