US Housing Market Continues to Weaken as Mortgage Rates Rise, Sentiment Wanes

The U.S. housing market remains a key weakness an otherwise booming economy, with rising rates holding back demand and a slump in new building keeping supply at bay, and could be big drag on consumer spending and sentiment heading into 2019.

Thirty-year fixed mortgage rates, the most common form of borrowing, rose to a seven-year high of 4.94% this week, according to data from the Federal Home Loan Mortgage Corporation, or Freddie Mac, while the National Association of Home Builders said its affordability index fell to the lowest level in ten years. The Federal National Mortgage Association, or Fannie Mae's, home purchase sentiment index, a closely-watched metric for housing investors, also slipped 2 points this week to a one-year low of 85.7 points.

"Higher mortgage rates have led to a slowdown in national home price growth, but the price deceleration has been primarily concentrated in affluent coastal markets such as California and the state of Washington," said Freddie Mac's chief economist Sam Khater continued. "The more affordable interior markets -- which have not yet experienced a slowdown home price growth -- may see price growth start to moderate and affordability squeezed if mortgage rates continue to march higher."

The Philadelphia Housing Sector Index, a measure of the twenty-biggest U.S. homebuilders, has fallen more than 9.2% over the fourth quarter and is down more than 24% for the year.

D.R. Horton Inc. (DHI) , the biggest homebuilder in the U.S., fell more than 9% Thursday, and looks to extend that decline again today, after it echoed Freddie Mac's concern that higher rates and rising home prices make the typical home buyer "affordably stretched and taking a little bit of time to reset to changing market environment."

D.R. Horton said it expects to finish between 11,000 and 11,500 single home units in the three months ending in December, its fiscal first quarter, but declined to provide guidance for the full 2019 year. 

The weaker-than-expected guidance follows a series of data reading that suggest further slowing in the U.S housing market. Last month, the California Association of Realtors said September sales fell 12.4% from 2017 and the average number of days on the market for a typical home sale rose 15% to 23.

"Many would-be buyers are self-sidelining as they believe home prices will start to come down soon, said CAR president Steve White.

That assessment was echoed by Fannie Mae's October sentiment survey, which showed that the net share of Americans who think now is s good time to buy fell 5 percentage points to 21%, which chief economist Doug Duncan said was the second-lowest reading in the survey's history.

"The contrast between the survey's findings of weak home buying sentiment and overall economic optimism mirrors what we're seeing in the broader economy," Duncan noted."While economic growth posted the fastest back-to-back pace in four years in the third quarter, residential investment declined for the third consecutive quarter, a first for the current expansion."

Last month, the Commerce Department said housing starts fell 5.3% in September to a seasonally-adjusted rate of 1.201 million units, while August numbers were revised lower to 1.268 million, as slowing construction in the south, which was impacted by Hurricane Florence, held down national growth.

That said, home prices in September rose by 5.6% from the same period last year, with every state apart from North Dakota registering gains, according to CoreLogic data, but that was the slowest pace since January 2017.

"Home price gains remain a positive catalyst for repair and remodel activity tied to rising owner's equity, though we expect rising inventory amid falling sales will continue to dampen price gains," wrote KeyBanc Capital Markets Kenneth Zener. 

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