Higher interest rates have already rattled Wall Street and are now reaching Main Street.
“Conditions in the housing market eroded more quickly than anticipated” in the past six weeks, according to the Beige Book for the Federal Reserve’s Dallas-based 11th district, which includes Texas and parts of New Mexico and Louisiana.
The report, which collects anecdotal information from key business contacts and other sources, said housing sales were off notably from earlier in the year, and online and foot traffic had slowed markedly. Cancellations also rose, in part because of problems qualifying for loans.
“Buyers were hesitant to move forward and were looking for better deals,” said the report, released Wednesday.
The turn in housing stands out because it was an economic darling during the pandemic. Sales and prices surged over the past two years as many homes drew bidding wars and sold for tens of thousands over the asking price.
The frenzy appears to have ended now that mortgage rates top 5%, up from just over 3% at the start of the year. That adds hundreds of dollars to buyers’ monthly payments.
While economic activity in the U.S. expanded modestly since mid-May, several Fed districts reported growing signs of a slowdown in demand and some cited higher risk of a recession, the Beige Book’s national summary said.
“Substantial price increases were reported across all districts, at all stages of consumption,” the summary said.
In the Texas district, economic growth “slowed to a modest pace” as surging prices, rising interest rates and higher uncertainty dented demand, the local report said. Texas businesses expect to raise selling prices by 7% this year, largely because of even higher increases in wages and input prices.
“We’ve seen a big shift in sentiment,” said Laila Assanie, senior business economist at the Dallas Fed. “More and more firms are concerned about the second half of the year. We’ve heard comments from a small share of our contacts who’ve actually seen a drop in demand for their goods or services. That is just starting to emerge now.”
The job market is still firing on all cylinders and consumers have been spending heavily, even while inflation weighs on their outlook. Many cities in Texas have racked up double-digit gains in sales tax revenue, a reflection of a strong economy and growing population.
There’s an apparent disconnect between consumer sentiment, which fell to a record low in June, and strong consumer spending.
“All the sentiment indicators have turned negative and people are not feeling good about the economy,” Assanie said. “Yet they’re spending away, so it can be hard to square it all.”
The Dallas Fed tracks credit card and debit card spending, and through mid-June, the total was 15% ahead of pre-pandemic levels. “So not let-up there,” she said.
How to explain strong spending amid growing pessimism? “They’re still holding on to their jobs,” she said, and wages have vaulted higher.
Many firms reported offering higher pay and bonuses to retain or hire employees, according to the local Beige Book. So far this year, wages are up 10% in the oil patch, the report said, adding that rig workers with no experience were being paid about $85,000 – for working half the year.
A maker of transportation equipment raised starting pay 40% and still had trouble hiring. A restaurant raised pay and benefits and still had to operate at 85% of capacity because of staffing shortages, the report said.
In many parts of the U.S., companies have been able to pass along higher prices to consumers. That’s been more difficult in Texas, especially for small firms and those in the services sector, according to the report.
Prices for homes remained flat, but outlooks are negative and expectations for home sales and starts are being revised downward.
The Dallas Fed started to see some slowing in housing in May, and there’s been more erosion since. “In the last few weeks, the market changed quite quickly,” Assanie said.
Builders expected home sales to taper off as mortgage rates rose, but they were surprised by the speed of the turn, she said. And few buyers are willing to pay a premium these days.
“Builders and even sellers don’t have as much pricing power,” Assanie said.
