Welcome back to Home Economics, a newsletter about the American housing market. This is The Week in Review, my weekly recap of macro and real estate news. Articles with a ◎ are free. Those with a ◉ have free previews but are only accessible in full for paying subscribers. Upgrade your subscription here:

We’ve been spoiled for sports to watch this summer, from the Tour de France to the Olympics. The most epic competitions often have “turning points”—times when the momentum shifted, or the leader consolidated their advantage. These turning points are usually pinpointed only in retrospect.

I wonder if we might look back on this week as a turning point for the economy. Home prices decelerated, the Fed hinted at rate cuts on the horizon, construction spending weakened, and the labor market lurched downward. Stocks and bond yields plummeted.

This week I wrote an article for HousingWire about the surprising stability of the housing cost to income ratio. It’s a bit of a head scratcher: prices have increased by more than 50% since the end of 2019, but when we look at housing cost as a proportion of after-tax income, most households aren’t spending anywhere near 50% more. I propose three explanations, of course with chart evidence to support them. The article is here ◉ (paywalled, but subscribers can schedule a call with me here ◉ to discuss my view).

This week was heavy with data and there is much to discuss, so I will only briefly highlight that next week is much lighter, with just the Fed’s Senior Loan Officer Lending Standards Survey (my favorite leading indicator) on Monday, the NY Fed Quarterly Report on Household Credit on Tuesday, and the Fannie Mae Home Purchase Sentiment Index (HPSI) on Wednesday.

Subscribers can download the housing economic data calendar here ◉

News: The Fed hinted at cuts in September, treasury yields plunged
Views: As I forecast last October, a sub-6% mortgage rate by year end is likely

Chair Powell suggested that the Fed will cut rates in September. 10y UST yields fell almost 20bp. Futures markets show that traders now expect 75bp-worth of rate cuts by year-end. This, of course, has important implications for mortgage rates.

In October 2023, I forecast 6% mortgage rates by the end of 2024¹. My argument was that lower inflation, slower growth, and Fed rate cuts would pull down treasury yields and therefore mortgage rates. My analysis was based entirely on the following leading indicators (signal → effect):

• Falling job hires and quits → slowing wages → lower inflation → lower yields

• Lower architect billings → lower housing starts → slowing growth → lower yields

• Falling private rent indices → lower measured CPI shelter inflation → lower yields

• Higher credit delinquency → lower consumption → slower growth → lower yields

• Tighter bank lending standards → slower growth → lower yields

• De-inverting 2/10 yield curve → recession → lower yields

• Lower Treasury funding and inflation vol → lower term premia → lower yields

• A steeper yield curve and lower rate vol → lower prepayment risk → lower yields

All of these have come to pass, and I continue to forecast sub-6% mortgage rates by year end. Subscribers can see my argumentation here:

My October 2023 forecast in three parts: Fed cuts ◉, lower term premia ◉, smaller mortgage spreads ◉. My re-iteration of these views in March 2024, here ◉.

News: Case Shiller home prices decelerated
Views: Normal home price valuations will be restored via years of slow gains

The Case-Shiller index used to be the gold standard for measuring home prices, but technology has evolved and these days Zillow is an equally accurate² measure for national prices, and far more timely (I argued this here ◉). Case in point: Tuesday’s Case-Shiller data (for May) covered home prices changes over March, April, and May. It’s now August.

In any case, the Case Shiller trend is the same as what Zillow has been showing for months—a gradual deceleration in the pace of price gains. I think there is further weakness to come.

For one, incomes are the best predictor of home prices, and they are softening. A handful of data points signal this: consumer sentiment is dropping; bank earnings calls highlighted a more tenuous financial situation for lower income households; and unemployment is ticking up slowly but steadily.

Second, home prices are now very high versus incomes and rents. A period of consolidation is in order (I fleshed out this argument recently here ◉).

News: Residential construction spending declined
Views: Homebuilding follows prices. Both should bounce around the current low level of gains.

Construction spending decreased in June, against expectations for a small increase (the level of activity was revised up on net in May and April). This makes sense: as prices moderate, so should construction.

I showed the relationship between home prices and home starts last year, here ◉ and in the chart below. The TLDR: “Periods of declining construction and falling prices (at least, in real terms) have overlapped. And, in terms of timing, prices tend to fall before construction cools. This makes sense, since it takes time for homebuilding companies to adjust to the falling demand, or oversupply, signaled by falling prices.” Sadly, builders maximize profits, not housing affordability (see my discussion about this with economist Cameron Murray, here ◉).

As price gains slow, the historical relationship between prices and construction suggests construction will slow, too.

News: Nonfarm payrolls rose 114k in July, below consensus expectations
Views: It’s just one reading, but a pretty bad one

As I noted two weeks ago (here ◉), employment in the construction sector continues to be very strong. This was apparent in the payrolls reading, where payroll gains by sector were amongst strongest in construction (+25k). That said, the employment report was undeniably very weak overall.

And while we shouldn’t read too much into a single number, especially because nonfarm payrolls is famously volatile and prone to revisions months later, all the labor market indicators corroborate the weakening implied by the headline figure:

• The unemployment rate rose 0.2 percentage points, to 4.3%, triggering the “Sahm rule”

• Average hourly earnings increased only 0.2% month over month in July, below expectations.

• While some commentators argue Hurricane Beryl was a factor, the BLS noted that it “had no discernible effect on the national employment and unemployment data for July.”

Goldman Sachs said the report “indicates that the softening in labor market conditions has now gone beyond the amount that was welcome.” Barclays said the Fed “will likely need to recalibrate its policy stance to account for a higher trajectory of unemployment”. Both banks and the market consensus now forecast 3 cuts this year (of 25bp each).

Cities: Skylines. For some reason I suddenly felt very compelled to play video games this week. I’m now sick of SuperMarioKart 8 on Switch (feels almost sacrilegious writing that), and wanted something a bit more analytical and…housing-related? Enter Cities: Skylines, where you lay down roads, establish water and power plants, etc., all with the goal of planning your way to a thriving city with happy citizens. If only real life were this easy. Cities: Skylines, for PC, Mac, and Steamdeck here ◉ ($29).

Koss Porta Pro headphones. I have far too many headphones. I love my Grado RS-IIs, which are as close to “local organic” as one can get in the headphone world: they’re made in Brooklyn and the cans are made with local mahogany. But they need a pre-amp to really shine, they cost $550, and make you look like a Russian cosmonaut. I love my Mac AirPod Pros, which connect seamlessly to my various Apple devices, and sound surprisingly good for buds. But sometimes I yearn for a buttery / retro / analog sound, and for that I turn to my iconic Koss Porta Pros, made by the Milwaukee-based Koss Corporation since 1984. At $39, I think they provide the world’s best audiophile experience per dollar. Koss Porta Pro Headphones, here ◉.

Dìdi. I love a good immigrant / coming of age story. Dìdi is about a Taiwanese-American boy growing up in Southern California—trying on different personalities, being awkward with girls, and fighting with his sister. As a bonus, the film is laced with late 90s/early aughts technology: Windows media player, MySpace, Facebook, and AIM chat. Dìdi, for US showtimes see here ◉.

I hope you’re having a great weekend.