The Federal Reserve danced to the tune of President Donald Trump and slashed the federal funds rate once again this week in what is believed to give another boost to the U.S. housing market.
As reported by Bloomberg, Moody’s Analytics chief economist Mark Zandi is of the opinion that the U.S. housing market is benefiting from the trade war. The resulting economic slowdown has led to lower mortgage rates. The Fed has been trying to prop up the economy by reducing interest rates, giving home buyers a great reason to get on the market. Zandi told Bloomberg:
“Perhaps the only beneficiary of President Trump’s trade war is housing, at least for the time being,” said Mark Zandi, chief economist at Moody’s Analytics. “The war has undermined the economy and pushed down mortgage rates.”
The Fed justified its latest rate cut saying that a cloudy global economic outlook warrants looser monetary policy. That’s not surprising as the International Monetary Fund (IMF) has reduced its 2019 global economic growth estimate to just 3%, which is the lowest in over a decade.
The trade war President Trump is waging on China is one of the key reasons behind the muted economic growth forecast for the year. IHS Markit estimates that the trade war could wipe off 0.8% of global real GDP this year and 1.4% in 2020.
The decline in real GDP is bad news for the U.S. housing market as it means that consumer spending is declining thanks to lower disposable income. Now, when consumers see their disposable incomes eroding, it is highly unlikely that they will be spending their money on a big-ticket item such as a house. This is especially the case for first-time buyers, who have remained on the sidelines of the housing recovery since 2008.
So even though the Fed is reducing interest rates and mortgage rates are plunging, the U.S. housing market is losing its wheels. Sales of both existing and new homes in the U.S. were down last month.
According to the Commerce Department, the number of new single-family homes sold in September was down 0.7%. Similarly, existing home sales data from the National Association of Realtors revealed a larger-than-expected drop of 2.2% in the number of units sold in September. All of this happened even though the 30-year fixed-rate mortgage rate is hovering near three-year lows.
What’s more, the U.S. housing market showed more signs of trouble as prices fell in September despite tight inventory levels. The median price of a new house in September was $299,400, a drop of 8.8% over the prior year. This indicates that sellers might be getting desperate to move inventories and save themselves in case a recession truly arrives.
These data points clearly indicate that the U.S. housing market is in a slump despite the Fed’s rate cuts to save the economy from Trump’s trade war. This is contrary to what Moody’s chief economist believes, and it is not hard to see why.
The latest data from the Bureau of Labor Statistics tells us that the U.S. economy added 128,000 jobs in October. Though this was much higher than the original expectation of 85,000 new jobs, we shouldn’t forget that it’s well below the average pace of hiring this year. The October unemployment rate increased to 3.6%, and hourly earnings growth of 0.2% was slower than expected.
All of this is bad news for the housing market as the job scenario in the U.S. isn’t as solid as it once was.
Zandi himself believes that unemployment in the U.S. could start rising, as reported by MarketWatch:
“The job slowdown is most pronounced at manufacturers and small companies,” Zandi added. “If hiring weakens any further, unemployment will begin to rise.”
This means that even if interest rates are low, consumers won’t be buying a new house if there are economic uncertainties and weak job growth. As such, even though the Fed has been forced into reducing interest rates to prop up the economy in light of President Trump’s trade war, the resulting reduction in mortgage rates won’t be enough to save the U.S. housing market from crashing.
Last modified: September 23, 2020 1:13 PM