US rise in mortgage rates puts breaks on housing market activity

(Alliance News) - If borrowing costs sustain the currently high levels, it "could generate further weakness in residential investments in coming quarters," Berenberg analysts Mickey Levy and Mahmoud Ghzalah said Thursday.

"Amid still-elevated home prices and tight supply, the sharp increase in financing costs is undercutting affordability and is like to further crimp transaction volumes and construction activity," Berenberg said.

In its primary mortgage market survey released last week Thursday, the Federal Home Loan Mortgage Corp known as Freddie Mac reported that 30-year fixed rate mortgages in the US averaged 7.23%, up from 7.09% a week earlier and higher than 5.55% a year prior.

Meanwhile, a sharp decline in construction industry salaries has been averted due to a "surge" in housing units under construction, Berenberg said, adding that: "Near-term developments in the mortgage and real estate markets hinge on whether mortgage rates remain at currently elevated levels, and merit close scrutiny."

Demand for homes in the US is down sharply annually but appears to slowly recover month-on-month, according to the National Association of Realtors. On Wednesday, it reported that the Pending US Home Sales index was up 0.9% in July to 77.6 from 76.8 in June, outperforming FXStreet-cited consensus of a 0.6% monthly decline. That is the second consecutive month-on-month increase, after 0.3% growth in June. An index of 100 is equal to the level of contract activity in 2001.

However, year-over-year, pending transactions in July are down 14.0%, albeit narrowed from a 15.6% annual decline in June.

"While the residential real estate market has weathered the effects of higher interest rates surprisingly well, recent increases in mortgage rates have lifted them to levels comparable to those in late 2022, a period associated with sharp declines in home sales and prices," Berenberg said.

It added, noting a cooling in multifamily construction: "With housing market conditions shifting in favour of home builders, the single-family residential construction sector has been resilient."

Currently, according to the CME FedWatch Tool, in the wake of soft economic US data, the market sees an 89% chance of the US central bank holding rates steady at its next meeting in September and a 56% chance of rates holding steady again at the following meeting in November.

A pausing of interest rate increases in the US may portend slower increases, or decreases in mortgage rates.

On Thursday, the Bureau of Economic Analysis said that headline personal consumption expenditure, or PCE, reading was up 3.3% in July from a year before, accelerating from a 3.0% annual rise in June. However, July's figure came in line with FXStreet-cited market consensus.

Further, on Wednesday, the Bureau said that quarter-on-quarter gross domestic product in the US increased 2.1% on an annualised basis in the second quarter of the year, downwardly revised from an initial estimate of 2.4% growth. In the first quarter, real GDP had increased 2.0%.

By Tom Budszus, Alliance News reporter

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