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Cracks Emerge in the U.S. Housing Market as Sentiment Starts Sliding

Last Updated September 23, 2020 1:07 PM
Harsh Chauhan
Last Updated September 23, 2020 1:07 PM

Confidence in the U.S. housing market has started going in the wrong direction. ‘=

Fannie Mae’s monthly Home Purchase Sentiment Index (HPSI) retreated  2.3 points in September to a reading of 91.5, as doubts begin creeping into the minds of consumers who now seem worried about the state of the economy and the future of their jobs.

The U.S. housing market seems to have peaked

Fannie Mae’s HPSI had hit a new high in August 2019 with a reading of 93.8, but September’s decline shows that the U.S. housing market may have peaked already. The slide from August to September is the biggest seen since December last year.

September’s slide brings an end to eight strong months of improving sentiment, and Doug Duncan, chief economist at Fannie Mae, blames it on uncertain economic conditions:

“Consumer sentiment remains relatively strong overall, though uncertainty about the economy and individual financial circumstances appear to be weighing on housing market attitudes a bit more than a month ago.”

That’s not surprising as recent jobs and manufacturing data out of the U.S. have not been up to the mark. Nonfarm payrolls for the month of September were below expectations, with employers adding 136,000 jobs, missing the 145,000 estimate.

However, unemployment fell close to 50-year lows thanks to the upward revision of the August and July numbers. Still, it cannot be ignored that there has been a slowdown in the creation of new jobs in certain sectors in recent months, and that could impact the housing market.

The three-month average for new job additions for the third quarter of calendar 2019 stood  at 157,000, down nearly 17% from the three-month average seen in the prior-year period.

According to Fannie Mae’s survey, there was an 8 percentage point drop in the number of Americans saying they are not concerned about losing their job. The reading came in at 69% last month. So, the gradual weakness in the job scenario seems to be affecting housing market sentiment now.

This is evident from the fact that there was a 7 percentage point decline in the number of Americans who believe that home prices will go up, according to Fannie Mae. Only 29% of the respondents believe that U.S. home prices will increase.

More signs of trouble

Prominent economists are already predicting a U.S. housing market crash, and Fannie Mae’s data indicates that they might not be wrong.

However, Fannie’s data are not the only red flag pointing toward a decline in the U.S. housing market. According to real estate listing website Realtor.com , housing inventory across the U.S. fell 2.5% year-over-year in September. The month-over-month decline accelerated as compared to the 1.8% decline seen in August.

Declining U.S. housing inventory can be attributed to increased demand on account of low mortgage rates, but the emergence of a worrying trend could hurt the market.

Realtor.com data tell us that the supply of entry-level homes that are priced below $200,000 was down a whopping 9.8% last month, while the supply of mid-tier homes was flat. Given that mid-priced homes account for 60% of houses on sale in the U.S., a lack of inventory growth is a point of concern.

That’s because buyers looking for entry-level and mid-tier houses in the U.S. will now have to pay more money to strike a deal. But the slowdown in job creation and weak wage growth could keep them from buying a house.

In such a scenario, home sellers will have to lower their prices in order to clear inventories. This will hurt the U.S. housing market that has seen impressive growth in recent months, but its future seems to be in the doldrums as things stand.