If we took a holiday… we wouldn’t buy home

The COVID resurgence is making more Americans not want to buy a home and use the money to go on vacation instead.

U.S. consumer confidence fell to a six-month low in August as worries about soaring COVID-19 infections and higher inflation dimmed the outlook for the economy.

The survey from the Conference Board on Tuesday showed consumers less inclined to buy a home and big-ticket items like motor vehicles and major household appliances over the next six months, supporting the  view that consumer spending will cool in the third quarter after two straight quarters of robust growth.

In fact, the production of goods for household use is plummeting on light demand.

Still, according to coverage in Reuters, more consumers planned to go on vacation, indicating a rotation in spending from goods to services was underway as economic activity continues to normalize following the upheaval caused by the coronavirus pandemic. 

Increased spending on services, which account for the bulk of economic activity, should keep a floor under consumer spending.

But let’s dig a little deeper into the housing and mortgage underbellies.

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Mortgage rates won’t be going up much higher any time soon.

But that was a close one.

In a speech, St. Louis Fed President James Bullard worried that the Fed’s balance sheet expansion is creating a housing bubble. He said that the tapering process should be finished by the end of the first quarter. 

What’s more, he articulated serious concerns about inflation; he seems skeptical that inflation is actually transitory and argued that by March 2022, the Fed would be able to assess whether inflation had moderated. He suggested that if inflation hadn’t moderated, the Fed would have to get “more aggressive,” which Invesco Global Strategist Kristina Hooper presume to mean rate hikes, and that would be sooner than expected. 

“Not surprisingly, these hawkish comments rattled markets,” she noted in a post on LinkedIn.

But then,  Federal Reserve Chair Jay Powell gave a speech asserting that any decision on rate hikes will be uncoupled from tapering. 

In other words, he suggested that we shouldn’t expect rate hikes to begin just because tapering has ended. He asserted that rate hikes have a different and far more stringent test: “until the economy reaches conditions consistent with maximum employment and the economy is on track to reach 2% inflation on a sustainable basis.”

Hooper said that, for now, all eyes will be on the August jobs report, due out at the end of this week. 

“There are whispers that this could be a blowout with more than 1 million non-farm payrolls created. If that happens, I believe the Fed would be even more comfortable announcing tapering in September and starting to taper in October,” she noted.

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The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported an 18.6% annual gain in June, up from 16.8% in the previous month. 

The 10-City Composite annual increase came in at 18.5%, up from 16.6% in the previous month. The 20-City Composite posted a 19.1% year-over-year gain, up from 17.1% in the previous month. 

Phoenix, San Diego, and Seattle reported the highest year-over-year gains among the 20 cities in June. Phoenix led the way with a 29.3% year-over-year price increase, followed by San Diego with a 27.1% increase and Seattle with a 25.0% increase. All 20 cities reported higher price increases in the year ending June 2021 versus the year ending May 2021. 

Mark Fleming, the Chief Economist at First American is not as concerned with the growing stick price.

Nominal house prices are well above the housing boom peak, but real, house-buying power-adjusted house prices remain 42 percent below the 2006 housing boom peak,” he said in a recent blog post.

Fleming notes that house-buying power has benefited from a long-run decline in mortgage rates and the slow, but steady growth of household income. 

Since the housing boom peak in unadjusted prices in 2006, the average 30-year, fixed mortgage rate has fallen by approximately 3.3 percentage points, from 6.32 percent to 2.98 percent. Over the same period, nominal household income has increased 55 percent, he said. 

“The dramatically lower mortgage rates and higher income levels mean home buyers in June had 129 percent more house-buying power than in 2006,” Fleming concludes.

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