Stocks pre-market: The Fed is killing the housing market

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The US economy grew at an adjusted annual rate of 2.6% in the third quarter, rebounding from two negative quarters and beating analysts’ expectations.

This ultra-resilient economy is facing aggressive attempts by the Federal Reserve to quell inflation by slowing growth through aggressive interest rates. But a quick look beneath Thursday’s GDP number reveals another story: It’s the housing market. the feeling falling under the burden and added weight of central bank policy.

What’s happening: Mortgage rates rose again this week, above 7% for the first time since 2002. These high rates, fueled by the Federal Reserve’s unprecedented campaign to raise interest rates to combat rising inflation, are beginning to choke the housing market. Sales of newly built homes fell 10.9% in September compared to August and 17.6% compared to a year ago., according to the data released on Wednesday.

The distribution of economic growth in the third quarter by sector highlights the enormous pressure that housing is under. Housing investment, which is a substitute for home construction and home sales, shrank at an annual rate of 26.4% between June and September, subtracting more from GDP than it has since 2007.

“This tells us that we are seeing a significant slowdown in both home buying and home building,” said Gregory Daco, chief economist at EY Parthenon. “Rising mortgage rates and sky-high house prices have led to a dramatic setback in first home buying and have driven investors away. Housing activity and all the activities surrounding home buying are constrained by financial conditions.”

Residential investment accounts for just 4 percent of the U.S. economy, but its sharp contraction this quarter had a dramatic impact, with overall growth falling by 1.37 percentage points, Daco said. This trend is expected to continue in the next quarter and into 2023. “One of the characteristics of this cycle is that we have seen that categories that generally have a limited impact on GDP have large impacts due to massive changes,” he said.

Downward spiral: Economists love to say that housing is the business cycle. The health of the housing sector is closely tied to the cost of borrowing, so it makes sense that Fed policy will weigh on home prices and sales earlier than other sectors. But housing is supportive of the rest of the economy, and these contractions will inevitably weigh on broader US growth.

He expects to see that impact on GDP in the fourth quarter, said Plante Moran Financial Investors CIO Jim Baird. Home ownership is the single largest source of wealth for US families, so shrinking it means a real loss of wealth across the country. “Households stop spending freely. They take it. That has an impact on the rest of the economy,” Baird said.

Big picture: President Joe Biden cheered the economic report, which came less than two weeks before the Democratic midterm elections.

“Doomsayers have been arguing for months that the U.S. economy is in recession, and Republicans in Congress have backed the recession,” he said in a statement Thursday morning. “But today we got more evidence that our economic recovery continues to move forward.”

But overall, the report is not as rosy as the headline numbers make it seem. That’s because the overall figure rose due to volatile international trade numbers: net exports were strong, but that’s because the United States is importing fewer goods as demand dries up. In truth, the American consumer is starting to bounce back: household spending rose 1.4% in the third quarter, compared to 3.0% the year before.

The European Central Bank announced another big interest rate hike on Thursday, raising rates at the fastest pace in the euro’s history in a bid to tackle aggressive inflation.

Policymakers also presented a tough outlook at the meeting, promising more hikes to come and anticipating a prolonged economic slowdown, colleague Hanna Ziady reports.

This move will bring the reference rate for the 19 countries that use the euro to 1.5%.

The annual inflation rate in the Eurozone had a record of 9.9% in September, 9.1% in August.

The “unpredictable and extraordinary” rise in inflation surprised policymakers, ECB President Christine Lagarde told reporters on Thursday. He said rising retail energy prices could push inflation even higher in the medium term.

Along with rising prices, the bloc’s economic slowdown is worsening.

Lagarde acknowledged that the risks to the economic growth outlook are “clearly” on the downside. “Economic activity is likely to slow significantly in the third quarter of the year and we expect further weakening at the end of this year and early next year,” he added.

Big Tech just can’t seem to catch a break.

Amazon shares fell 13% in premarket trading on Thursday after the company posted weaker-than-expected third-quarter earnings and cut its future sales outlook in its quarterly report.

The company warned that fourth-quarter revenue was expected to be between $140 billion and $148 billion, below analysts’ prior estimates of $155 billion.

Even Apple was not immune to the curse of Big Tech. The company beat Wall Street expectations on Thursday afternoon, but missed expectations for sales of major products including the iPhone business and services. Shares rose 1% in premarket trading.

Amazon and Apple rounded out a dismal earnings week for some of the biggest US tech companies. Alphabet ( GOOG ) and Facebook parent Meta Platforms ( META ) missed earnings expectations last quarter, citing a slowdown in the digital ad market. Microsoft also provided lackluster forward guidance and reported disappointing revenue from its cloud service.