The Wealth-Building Power of Homeownership

The latest home price appreciation data highlighted the long-term wealth-building opportunity of homeownership. Also of note, home sales and construction cooled in July, and the Fed’s meeting minutes pointed to the importance of upcoming inflation and jobs data. Here’s what you need to know.

·       How Homeownership Can Build Wealth Over Time

·       New Home Construction Slows

·       Pending Home Sales Fall Again

·       Fed Minutes: Key Takeaways

·       Jobless Claims Pulse Check

How Homeownership Can Build Wealth Over Time

Home prices increased 0.21% from July to August and are now 1.71% higher than they were a year ago, according to ICE’s latest Home Price Index.

Bottom line: Based on the pace of appreciation over the past six months, home prices are currently on track for about 3% annual appreciation. While that may seem modest, the impact can add up over time.

For example, a $500,000 home appreciating at 3% per year would gain roughly $15,000 in value in the first year, $80,000 over five years, and $172,000 over 10 years. That growth can become a meaningful part of a homeowner’s overall wealth over the long term.

New Home Construction Slows

After a strong June, housing starts fell 12.4% in July, coming in below expectations. Housing starts track new homes where construction has begun, and the annual pace fell to 1.24 million units.

Building permits, which can provide a window into future construction, rose 5% from June to an annual pace of 1.44 million units in July. Even so, the latest survey of home builder sentiment suggests builders remain cautious. The National Association of Home Builders Housing Market Index rose one point in August to 35, but any reading below 50 means more builders view market conditions as poor than good. High mortgage rates, affordability challenges and elevated construction costs continue to weigh on builder confidence.

Bottom line: Household formations, an important measure of housing demand, is running at an annual pace of about 1.4 million households – above the current pace of housing starts. Builders have pulled back as higher mortgage rates have kept some buyers on the sidelines. If rates fall and more buyers return to the market, additional housing supply will be needed to meet that pent-up demand.

The challenge is that new homes take time to build. Builders must work through permitting, construction, and completion before new inventory reaches buyers. If mortgage rates decline and demand picks up, limited housing supply could continue to support home prices in the months ahead.

Pending Home Sales Fall Again

Pending home sales, which track signed contracts on existing homes, fell 2.3% from June to July, marking a second straight month of declines. Sales fell across all four regions and were down 2.2% from a year ago.

Bottom line: NAR Chief Economist Lawrence Yun said the highest mortgage rates of the year arrived during the summer, “pulling back contract signings.”

Fed Minutes: Key Takeaways

The latest minutes from the Federal Reserve’s July meeting showed just how important upcoming inflation and labor market data will be for future rate decisions. The Fed voted to keep its benchmark Federal Funds Rate unchanged, with three policymakers dissenting in favor of a quarter-point hike. The minutes also showed that “many participants” believed rate hikes could be appropriate if inflation failed to decline.

For context, the Fed Funds Rate influences borrowing costs across the economy, though it does not directly set mortgage rates.

Bottom line: The inflation data released since the July meeting has been more encouraging, with both consumer and wholesale inflation coming in at or below expectations in July. At the same time, the July jobs report showed job losses and other signs of labor market weakness.

Cooler inflation and a softer labor market could reduce pressure on the Fed to raise rates. While current expectations favor the Fed holding rates steady at its September meeting, policymakers will continue watching inflation, employment and geopolitical developments, including events in the Middle East, as they consider future rate decisions.

Jobless Claims Pulse Check

New unemployment claims fell slightly to 206,000 last week, while continuing claims stayed elevated at 1.799 million.

Bottom line: Initial claims remain relatively low by historical standards, but they may not tell the whole story. Some workers who lose their jobs may turn to freelance, contract or gig work rather than file for unemployment, which could mean the data is understating some labor market weakness.

At the same time, elevated continuing claims suggest that unemployed workers are taking longer to find their next job.