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Smoke on Cars

Auto Market Weekly Summary: September 26


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Article Highlights

  1. Climbing mortgage rates cause residential construction to drop, existing home sales to slip.
  2. Federal Reserve raises rate with more increases to come. Recession chances grow.
  3. Consumer sentiment dipped on higher interest rates, rising gas prices and falling stock market. Jobless claims remain low.

Residential construction is headed further down with a 10% decline in permits in August. Existing home sales dropped less than expected in August, but sales have fallen for seven straight months. More declines are expected as supply is shrinking as fewer existing homeowners are interested in selling. With the Fed’s aggressive rate plans, mortgage rates may be 2 percentage points higher by year-end. 

Initial jobless claims increased in the latest week’s data, but jobless claims overall remain very low. 

Consumer sentiment dipped slightly last week and is likely going to end September down with interest rates jumping, stocks falling and gas prices increasing again.

Trend Signals Home Market in Decline

Residential construction trends were mixed in August, but the key underlying trend signals bigger declines ahead. 

The seasonally adjusted annualized rate of starts increased 12.2% when starts were expected to be steady. However, permits declined 10.0% when a smaller decline of 4.8% had been expected. The starts increase was driven by the more volatile multi-family component with a 28% increase and a smaller 3.4% increase in single family. After the August increase, starts were up 0.1% from a year ago and up 15.0% compared to August 2019. 

Permits were down 14.4% from a year ago and up only 2.2% compared to 2019. Permits lead starts, so the permitting pace at 1.517 million units was lower than the 1.575 million starts pace, which is an indication that starts will decline in future months. In permits, single-family declined 3.5% in August while multi-family declined 17.9%. Compared to 2019, single-family permits were unchanged, while multi-family permits were up 5.5%. 

Existing home sales dipped less than expected in August but extended the decline streak to seven straight months. The market continues to see the impact of a substantial increase in mortgage rates that rivals any other period of change in modern history. 

The pace of sales in August dropped to the slowest pace since May 2020. The existing home sales SAAR declined 0.4% to 4.80 million from 4.82 million in July. At the August rate, existing home sales were down 19.9% from a year ago and down 12.2% compared to August 2019. Inventory declined to 1.28 million units, which was unchanged from a year ago. 

The National Association of Realtors reported that supply will be limited for potentially the next couple of years as existing homeowners are unwilling to lose their low mortgage rates in attempting to trade up or down. Inventory is still moving quickly, as 81% of the homes sold in August were on the market for less than a month, and the typical time on the market was 16 days, which was up from 14 in July but down from 17 in August last year. The months’ supply of homes for sale was steady at 3.2 months, and that level of supply is just half of what is considered normal. The median sales price declined to $389,500, which was up 7.7% from a year ago.

Jobless Claims Remain Below Pre-Pandemic Level

Seasonally adjusted initial jobless claims increased by 5,000 to 213,000 for the week ending September 17. Non-seasonally adjusted claims increased by 19,000. Both measures had been declining since peaking in July but are now increasing again. 

The non-seasonal number remains lower than it was at the beginning of 2020 before the pandemic began. Continuing claims, which represent people who previously filed and remain on traditional unemployment compensation, declined by 22,000 from the prior week, bringing the total down to 1.38 million as of the week ending September 10. That level of continuing claims was 384,000 lower than it was prior to the pandemic. 

The broadest measure of continuing claims declined by 96,000 to 1.30 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is down 96,000 over the last four weeks of data and is 807,000 lower than the pre-pandemic level. 

Fed Slows Economy With Aggressive Rate Increases

The Federal Reserve moved forward with aggressive monetary tightening in their quest to quell 40- year highs in inflation. The Federal Funds Rate was increased by 75 basis points to 3.00-3.25%. 

The Fed also released updated “dot plot” projections for rates, which indicated an expectation to raise rates an additional 1.25% by year-end and another .25% early in 2023. The updated projections also indicated that the Fed intends to leave rates in a restrictive territory at least through 2025. The Fed also updated forecasts, which indicate further slowing of economic growth expected along with a rise in the unemployment rate to 4.4% in 2023. Such an increase implies a recession will occur.

Consumer Sentiment Could Backslide Due to Higher Interest Rates, Gas Prices

Consumer sentiment has increased in September following gains in July and August, but the September gain may evaporate before the month is over as consumers contemplate higher interest rates ahead and respond to declining equities. The daily index of consumer sentiment from Morning Consult has increased 1.1% so far in September but was down 0.1% week over week as of last Friday.

The price of gasoline also increased this week, breaking what had been a 98-day streak of price declines. Gas prices are down 26.5% from the peak of $5.02 in June. The average price of unleaded gas was down 0.1% from the week before at $3.69 on Friday, September 23. However, gas prices inched higher for three consecutive days late last week.

TWO DAYS TO GO: The Q3 Cox Automotive Industry Insights and Forecast Call will be held on Wednesday, September 28. Jonathan Smoke and the Industry Insights team will host a conference call to review industry performance in the third quarter and what is expected for the remainder of the year. RSVP to attend.

Jonathan Smoke is chief economist at Cox Automotive.

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