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New Home Sales Tumble in July, Down 29% From a Year Ago as Housing ‘Recession’ Deepens

U.S. News & World Report logo U.S. News & World Report 8/23/2022 Tim Smart
A sign "For Sale" is displayed in front of a renovated individual House in Washington on April 24, 2020. - Sales of new single?family houses collapsed in March as the lockdowns to contain the coronavirus outbreak took effect, dropping 15.4 percent compared to February, according to government data released on April 23, 2020. (Photo by Eric BARADAT / AFP) (Photo by ERIC BARADAT/AFP via Getty Images) © (ERIC BARADAT/AFP/Getty Images) A sign "For Sale" is displayed in front of a renovated individual House in Washington on April 24, 2020. - Sales of new single?family houses collapsed in March as the lockdowns to contain the coronavirus outbreak took effect, dropping 15.4 percent compared to February, according to government data released on April 23, 2020. (Photo by Eric BARADAT / AFP) (Photo by ERIC BARADAT/AFP via Getty Images)

Sales of new homes fell 12.6% in July, following a drop in May, as the housing sector continues to soften from the twin shocks of rising mortgage rates and higher prices, the Census Bureau reported on Tuesday.

The decline to an annual rate of 511,000 from the revised June number of 585,000 confirms housing is now in a “recession,” as the National Association of Home Builders said recently, putting the dampers on a sector of the economy that led the way during the coronavirus pandemic as people hunkered down. Its decline will have ripple effects throughout the broader economy, raising the stakes that a recession could be in the cards for 2023 or later.

“The combination of high prices and high mortgage rates have deterred some buyers, and many are deciding to either continue renting or to stay in their existing homes,” said Kelly Mangold, a principal at RCLCO.

“Forward-looking indicators suggest that the housing slowdown has more to go,” LPL Financial Chief Economist Jeffrey Roach wrote on Monday ahead of the release. “The National Association of Home Builders (NAHB) index, another important housing metric, fell in August to below 50 for the first time since May 2020. Traffic of prospective buyers, a leading indicator of future sales, also fell to its lowest since May 2020.”

“At this rate, home sales will likely continue to slow and residential investment could turn out to be a drag on Q3 economic growth,” Roach added. “Given the lag between Federal Reserve (Fed) policy and the real economy, we have not likely seen the bottom in the housing market.”

Added Nicole Bachaud, senior economist at Zillow,: “The housing market is in the midst of a much-needed rebalancing as prices are leveling off, slowly transitioning power back into the hands of buyers who can afford to stick around”

“But the market is still a long way off from finding a sweet spot, and discouraging new construction data shows how far there is left to go to reach a true equilibrium,” she added. .

Housing is among the first sectors to feel the brunt of the Fed’s tightening of monetary policy, as its raising of interest rates has had a direct impact through higher mortgage rates that have hit the 5% range after recording record lows in the past two years.

The Fed is holding its annual summer camp research confab in Jackson Hole, Wyoming, where the central bank’s chairman, Jerome Powell, is expected to clarify the interest rate posture going forward. After raising rates by 75 basis points in June and July, the Fed does not meet again until September. Analysts are divided on whether a 50 or 75 basis point rate hike will occur then.

The lack of clarity on future monetary policy has Wall Street on edge, with the Dow Jones Industrial Average down more than 600 points on Monday. Stocks had rallied in recent weeks on hopes of slowing inflation and earnings that came in better than expected.

But with the war in Ukraine hitting the six-month mark with no end in sight, and European economies facing runaway inflation, slowing growth and uncertain energy markets, traders took on a negative tone as the summer comes to an end.

“Given the current environment, the Fed is left with no choice but to continue their path higher as it will fight inflation in the short term (at the expense of the growth of the economy) and serve up an opportunity to stimulate the economy if inflationary drivers unexpectedly pull back sooner (or the economy starts sinking),” said Johan Grahn, head of ETF Strategy at AllianzIM. “When you lead, it helps if you know where you’re going – and for the Fed it should be clear that “rates up” is the only game in town, for now.”

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