US new home sales, private sector business activity tumble

WASHINGTON: Sales of new US single-family homes plunged to a 6½-year low in July as persistently high mortgage rates and house prices further eroded affordability.

The report from the Commerce Department on Tuesday (Aug 23) added to a stream of weak housing data, and suggested that the Federal Reserve’s aggressive monetary policy tightening campaign to slow the economy in order to tame inflation was achieving some desired results in the housing market. But with house prices remaining elevated amid a critical shortage of previously owned properties, a total housing market collapse is unlikely.

“The Fed is getting what it wants,” said Matthew Walsh, an economist at Moody’s Analytics in West Chester, Pennsylvania. “The housing market needed to cool, and higher interest rates were the only thing that was going to accomplish that.”

New home sales tumbled 12.6% to a seasonally adjusted annual rate of 511,000 units last month, the lowest level since January 2016. June’s sales pace was revised down to 585,000 units from the previously reported 590,000 units.

Economists polled by Reuters had forecast that new home sales, which account for 9.6% of US home sales, would decrease to a rate of 575,000 units.

Sales dropped 29.6% on a year-on-year basis in July. They peaked at a rate of 993,000 units in January 2021, which was the highest level since the end of 2006.

The Fed has increased its policy rate by 225 basis points since March. Fed chair Jerome Powell’s address on Friday at the annual Jackson Hole global central banking conference in Wyoming could signal how much further the US central bank needs to tighten monetary policy.

Mortgage rates, which move in tandem with US Treasury yields, have soared, with the 30-year fixed-rate mortgage averaging 5.13%, up from 3.22% at the start of the year, according to data from mortgage finance agency Freddie Mac.

Despite slowing demand, house price growth remains strong. The median new house price in July was US$439,400 (RM1.97 million), an 8.2% jump from a year ago. While that was a deceleration from the double-digit growth seen early in the year, average house prices jumped 18.3% year-on-year in July.

None of the houses sold last month were below US$200,000.

Overall economic activity is slowing in response to the stiffest run of interest rate increases since the 1980s.

US private-sector business activity contracted for a second straight month in August to its weakest in 27 months with particular softness registered in the services sector as demand weakened in the face of inflation and tighter financial conditions.

The S&P Global flash composite purchasing managers index (PMI) for August dropped to 45 this month – the lowest since May 2020 – from a final reading of 47.7 in July. A reading below 50 indicates a contraction in activity.

The falloff was more notable in services, where that sector's PMI dropped to 44.1 from 47.3 last month, than in factory activity. The survey’s manufacturing gauge still showed modest expansion at 51.3 verus July's 52.2.

Both were the lowest since mid-2020 and were also below the median estimate in a poll of Reuters economists, with the services reading coming in well below the consensus forecast of 49.2. The factory activity estimate was 52.

“Material shortages, delivery delays, hikes in interest rates and strong inflationary pressures all served to dampen customer demand, according to panelists,“ the report said.

The composite survey's new orders index contracted to a reading of 48.8 – the lowest since May 2020 – from 50.8 in July. Aside from the dive in new orders during three months in the spring of 2020 around the first wave of Covid-19 lockdowns, the August reading was the lowest since the series launched in October 2009.

The survey's indexes of input and output prices both fell again, to the lowest since February of 2021, the latest signal that inflationary pressures may be easing.

But the second straight monthly decline, which was concentrated in the services sector, probably exaggerates the emerging softness in the economy.

The Institute for Supply Management survey, which has a longer history than the S&P Global survey, showed the services sector growing at a strong clip in July. Underlying retail sales were also solid last month. – Reuters

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