Housing Continues to Slow, While Recent Data Indicates Likely Modest Economic Growth in Q3

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, declined 0.6 percent annualized in Q2 2022, according to the second estimate from the Bureau of Economic Analysis, up from the 0.9 percent decline shown in the preliminary reading. Stronger consumer spending in Q2 drove the upward revision, with consumption now showing growth of 1.5 percent annualized in Q2, 0.5 percentage points above the preliminary estimate. Gross Domestic Income (GDI) rose 1.4 percent annualized after rising 1.8 percent annualized in Q1.
• Personal income, adjusted for inflation, rose 0.3 percent in July, according to the Bureau of Economic Analysis. Real disposable personal income rose 0.3 percent, while real personal income less transfer payments increased 0.4 percent, the largest increase since October 2021. Real personal consumption expenditures rose 0.2 percent. The personal saving rate was unchanged at 5.0 percent. The PCE price index declined 0.1 percent over the month but rose 6.3 percent from a year ago, a deceleration of five-tenths from June. Core PCE rose 0.1 percent over the month and 4.6 percent from a year ago, a deceleration of two-tenths from June.
• Durable goods orders were flat in July, according to the Census Bureau, while shipments of durable goods rose 0.4 percent. Inventories of durable goods rose 0.2 percent. Orders for core capital goods (nondefense excluding aircraft) rose 0.4 percent, while shipments of core capital goods rose 0.7 percent.
• New single-family home sales fell 12.6 percent in July to a seasonally adjusted annualized rate (SAAR) of 511,000, the lowest level since early 2016, according to the Census Bureau. New single-family home sales were down 32.3 percent from a year ago. Homes for sale at the end of July rose 3.1 percent to a SAAR of 464,000, the highest level since 2008, with completed homes for sale jumping 12.5 percent. The months’ supply rose 1.7 to 10.9, the highest level since March 2009.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, fell 1.0 percent in July to 89.8, the eighth decline in the past nine months.

Forecast Impact:

The upward revision to the Q2 estimate of real GDP, as well as the healthy increase in GDI, both lend more evidence that, despite two consecutive quarters of negative GDP growth, the economy did not enter a recession in the first half of the year. The upward revision to consumption in Q2 points to modestly more consumer resiliency entering the quarter. Given the recent decline in gasoline prices, as well as the price for several agricultural commodities, we expect headline inflation to slow in the near term even as core inflation remains elevated. We believe this will also help drive modest consumer spending growth over the coming months. The rise in orders and shipments for core capital goods supports our view of a rebound in business investment in the third quarter.

In housing, the market continued to slow, with both new home sales and pending sales falling further in July. New home sales fell sharply and by more than we had anticipated, which will likely lead us to downwardly revise our outlook for new homes sales in the near term. The decline follows the recent peak in mortgage rates at the end of June. While mortgage rates have since pulled back, we believe it is unlikely to lead to a large increase in home sales given that mortgage rates remain 268 basis points higher than a year ago, though it may help slow the pace of future sales declines. Coupled with the drop in new home sales was an increase in the number of homes available for sale. Notably, the July reading showed the number of completed homes for sale breaking out of the tight range it had been in since March 2021, rising to the highest level since September 2020. If more completed new homes begin to sit on the market without moving, this may prompt builders to begin discounting current prices more aggressively to attract buyers, which aligns with our view of decelerating home price growth through the end of the year.

Ricky Goyette
Economic and Strategic Research Group
August 26, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and 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, 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.