U.S. Economic, Housing and Mortgage Market Outlook – May 2024

In this Issue

• Economic growth moderated in the first quarter and the labor market showed some signs of cooling. The effects of high inflation are weighing on growth.
• Mortgage rates rose above 7% in April and these higher rates slowed the housing market with declines in home sales and new construction.
• An analysis of mortgage rates by generation suggests that while Millennials and Gen Xers on average have secured low rates, refinance potential still exists among these generations. MORE

Recent developments

U.S. economy: U.S. economic growth moderated to start the year. According to the U.S. Bureau of Economic Analysis (BEA) “advance” estimate of Real Gross Domestic Product (GDP), the seasonally adjusted annual rate (SAAR) of growth in GDP in Q1 2024 was 1.6%, slowing from a 3.4% rate in Q4 2023. The deceleration in GDP growth was led by slower growth in consumption expenditures, net exports, and government consumption expenditures.

Consumer spending was weaker due to a decline in spending on durable goods, primarily autos, and flatlining nondurable goods, primarily due to less spending on gasoline. Spending on services accelerated in the first quarter, led by higher spending on health care, financial services and insurance.

Trade weighed on GDP growth with more modest exports and an increase in imports. Compared to most advanced economies, the U.S. economy continues to perform relatively well.

The positive tailwinds to overall growth from government spending are waning. The contribution to GDP growth from government consumption expenditures and gross investment remains positive but was less than a third of what it was in Q4 2023. The latest report paints a picture of an economy that continues to perform well, but that is moderating as it settles into a growth pattern more consistent with long-run trends.

Consistent with economic growth trends, the labor market moderated in April 2024 with nonfarm payroll employment increasing by 175,000, down from an increase of 315,000 in March, according to the Bureau of Labor Statistics (BLS). The unemployment rate inched up from 3.8% in March to 3.9% in April. However, the unemployment rate has remained below 4% for the twenty-seventh consecutive month. Average hourly earnings for all employees on private nonfarm payrolls rose 0.2% month-over-month, and compared to a year ago, average hourly earnings increased 3.9%. Overall, the jobs report indicates a resilient but cooling labor market.

The core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge that strips out volatile food and energy prices, rose 0.3% month-over-month in March.¹ While this increase in the core PCE was in line with expectations, the progress on inflation has slowed and has implications for future Federal Reserve monetary policy. The index increased 2.8% from a year ago and remains above the Federal Reserve target of 2.0%.

The Consumer Price Index (CPI) increased by 0.4% in April, exceeding consensus expectations and triggering a negative market reaction. In another sign of persistent inflationary pressures, the employment cost index came in above expectations with a 1.2% quarter-over-quarter increase in Q1 2024 and a 4.2% increase in compensation costs over the year. The persistence of inflation has led market participants to conclude that the likelihood of multiple Federal Reserve rate cuts in 2024 is diminished and the next rate cut is also likely further away.

In summary, U.S. economic growth moderated at the beginning of 2024, reflecting the impact of higher interest rates and declining consumer savings. The labor market also showed signs of cooling with softer-than-expected job growth in April.

U.S. housing and mortgage market: After benefitting from stable mortgage rates in the first couple of months of the year, the housing market witnessed a slowdown in March due to the rebound in rates. Total (existing + new) home sales for March fell by 2.7% from February and were down 2.1% from a year ago. This decline was led by existing home sales, which continued to reel under the impact of rising rates. Existing home sales were at an annual rate of 4.19 million in March, 4.3% below February sales and 3.7% lower than March 2023.² However, new home sales for March grew 8.8% from February to an annualized rate of 693,000, accounting for about 14% of total home sales.³ As the supply of existing homes for sale remains low and home prices continue to rise, more buyers are choosing to purchase new homes than in previous years.

According to the National…