Fed Hikes Rates, Home Construction Cools

The Fed hiked rates for the first time in three years, while new home construction slowed and home contract signings edged up slightly from the previous month. Here's what you need to know.

·       Fed Hikes Rates in Unanimous Vote

·       New Home Construction Cools

·       Pending Home Sales Tick Higher

·       Quick Look: Spending and Unemployment

Fed Hikes Rates in Unanimous Vote

As widely expected, the Federal Reserve raised its benchmark Federal Funds Rate by 25 basis points. It was the Fed’s first rate hike in three years and its first rate change this year, following five consecutive meetings where rates remained unchanged.

Keep in mind that the Fed Funds Rate is the overnight borrowing rate for banks and is not the same as mortgage rates.

Bottom line: The decision to raise rates was unanimous, with the Fed pointing to elevated inflation as a key reason for the move. When the Fed raises its benchmark rate, it generally aims to slow economic activity and put downward pressure on inflation.

In its statement, the Fed said, “Inflation remains elevated,” and that the rate increase will support a return to its 2% inflation goal. Reinforcing that message at his post-meeting press conference, Chair Kevin Warsh said, “Inflation is too high and has been for too long.”

The Fed’s latest projections also showed that 16 of 18 officials expect at least one more quarter-point hike this year. Warsh did not submit a projection.

New Home Construction Cools

New home construction slowed in August, with housing starts falling 2.6% from July to an annual pace of 1.28 million homes – below expectations. Housing starts measure homes where construction has begun.

Building permits, which can offer a glimpse into future construction, also declined 2.7% from July, reaching an annual pace of 1.39 million permits.

Builders remain cautious as well. The National Association of Home Builders Housing Market Index fell three points in September to 32. A reading below 50 means more builders view market conditions as poor than good. Higher mortgage rates, labor shortages, and elevated construction costs continue to weigh on builder confidence.

Bottom line: Housing demand remains relatively strong compared with the pace of new construction. Household formations, a measure of how many new households are being created, were running at an annual pace of about 1.4 million as of June 30. That pace may have eased somewhat as mortgage rates rose, but it still suggests demand is roughly in line with, or slightly above, the current pace of new housing supply.

The catch? New homes take time to reach the market. Builders have to navigate permitting, construction, and completion before buyers can move in. If mortgage rates decline and housing demand picks up, the limited supply of new homes could continue to support home prices in the months ahead.

Pending Home Sales Tick Higher

Pending home sales, which measure signed contracts for existing homes, edged up 0.3% from July to August. However, sales were still down 4.7% from a year ago, with all four U.S. regions posting year-over-year declines.

Bottom line: Higher mortgage rates are weighing on housing activity, but they haven't brought the market to a standstill. Buyers still “steadily entered into contracts” last month, according to NAR Chief Economist Lawrence Yun, even as overall sales remained below last year's pace.

Quick Look: Spending and Unemployment

Retail sales rose 1.2% in August, beating expectations. Higher gas prices helped drive stronger sales at gas stations, lifting the overall result. But the gains were broad-based: 12 of 13 retail categories saw sales increase, with back-to-school shopping likely providing an additional boost.

Unemployment claims have told a similar story in recent weeks. Initial claims remain relatively low, at around 196,000, but they may not capture the full extent of job losses if some workers turn to freelance or gig work instead of filing for benefits. At the same time, continuing claims remain elevated at 1.73 million, suggesting some job seekers are taking longer to find new employment.