|The housing slowdown continued into the New Year, as markets grappled with an evolving monetary policy outlook and a federal government shutdown. Home builder confidence, as measured by the NAHB/Wells Fargo Housing Market Index, declined four points in December, registering a level of 56—the lowest reading in more than three years. |
The slowdown during the second half of 2018 was primarily caused by rising interest rates and the subsequent decline of housing affordability. For example, existing home sales in November were 7% lower than a year earlier, while pending sales were down nearly 8%. Similarly, single-family construction starts declined 4.6% in November. Nonetheless, single-family construction totals for the year are expected to be approximately 3% higher than the previous year, making 2018 the best year for residential construction since the Great Recession.
While the labor market remains hot—December job gains reached 321,000—housing and other sectors of the economy are showing definite signs of slowing. For this reason, the stock market endured a large selloff after the Fed raised the short-term federal funds rate in December to a top rate of 2.5%—the fourth hike of 2018. NAHB’s forecast calls for just two rate increases in 2019, one in each half of the year, accompanied by a mid-year data-focused policy pause so the central bank can evaluate economic growth and inflation pressures. Two rate increases are more than Wall Street is currently pricing in; however, it is lower than the three or four rate hikes that many economists—as well as the Fed’s own projections—had suggested for 2019 until quite recently.
The stock market selloff, while painful for investors, resulted in a significant decline in the 10-year interest rate, falling from above 3.2% to approximately 2.7% this week. This 50 basis point decline has reduced mortgage interest rates, which suggest a potential uptick in home sales during the next two months. Throughout the upcoming year, housing markets should expect rates to resume their ascent, heading near 5% by the end of 2019.
–NAHB Chief Economist Robert Dietz