Higher Borrowing Costs Continue as Economy Slows

Is the housing market finally shifting? There are some positive signs, but it's too soon to celebrate.

A recent Redfin report shows that home prices are increasing at their slowest rate in nearly a year and a half, which is good news for potential buyers. This slowdown in price growth is partly due to an increase in new listings. In May, new listings rose by 0.3% from the previous month and were up 8.8% compared to last year. However, they are still nearly 20% below pre-pandemic levels.

The Bureau of Labor Statistics released its Job Openings and Labor Turnover Survey, indicating that job openings are at a three-year low. Additionally, retail sales, which reflect consumer spending, came in lower than expected. Since consumer spending makes up two-thirds of economic activity, this points to a slowing economy.

While slowing home price gains and a cooling job market might seem positive for the housing market, there are challenges.

The bond market faces pressure from the heavy supply of Treasury bonds needed to fund the growing U.S. debt and government operations. This increased supply could lower bond prices, raise yields, and lead to higher borrowing costs.

In the homebuilding sector, inflation is driving up construction costs, and builders are struggling with labor shortages and a lack of buildable lots. Additionally, many homeowners are hesitant to sell due to their low mortgage rates, contributing to the low supply of homes on the market.

Bottom line: The recent weakening in the labor market and economic data are somewhat welcomed by Federal Reserve members, as they believe this will help continue pushing inflation lower. Moving forward, we might see gradual improvements in borrowing costs as the economy slows, inflation declines, and central banks start lowering rates.