This week’s housing data did much to confirm a slowdown sought by the Federal Reserve. Along with what may have been peak inflation last week, cooler housing data is another piece in the puzzle as the FOMC tightens conditions. The outlier remains the labor market, where jobless claims dropped this week and payroll growth remains strong.

By the numbers: the August NAHB measure of homebuilder confidence fell below 50 for the first time since May 2020. Housing starts for July dropped 9.6%, more than expected, (although permits dropped less than forecast). And most recently the NAR reported that July existing home sales fell 5.9%, more than anticipated.

“Existing home sales have now fallen for six months in a row, and are 26% lower than the January peak,” Pantheon Macro Economist Ian Shepherdson said. “But the bottom is still some way off, given the degree to which demand has been crushed by rising rates; the required monthly mortgage payment for a new purchaser of an existing single-family home is no longer rising, but it was still up by 51% year-over-year in July.”

“To make matters worse, the market is now grappling with rapidly rising supply as well as crumbling demand,” he added. “Our measure of seasonally adjusted existing single-family homes for sale rose 6% in July, but it has a long way to go before it reaches pre-Covid levels.”

“Home sales likely have further to fall,” Odeta Kushi, deputy chief economist at First American Financial, tweeted. “Mortgage applications so far in August point to another decline in existing-home sales. This month’s number of 4.81 million puts us at about 2014 sales level.” (See chart at bottom.)

Fed reaction: The market predictions for the Fed’s move next month have been volatile through the week and there is still Jackson Hole coming next week. But while chatter from members remains hawkish, after all the housing figures expectations are back to a 65% chance of 50-basis-point hike over 75.

“Fed officials pay particularly close attention to the housing market and are monitoring how higher mortgage rates are impacting home sales and housing prices in order to gauge how tighter monetary policy is affecting the broader economy,” Wells Fargo economists wrote.

In the July FOMC minutes just released, members said housing activity “had slowed notably.”

“We agree with the Fed’s assessment that home sales likely have further to fall,” Wells Fargo said. “As of August 12, mortgage applications for purchase have declined on a week-to-week basis in seven of the previous eight weeks.”

Retail resilience? While housing is struggling there were also signs for some optimism. Results from Home Depot (HD) and Lowe’s (LOW) showed that the home improvement consumer is “holding up quite well,” according to Oppenheimer analyst Brian Nagel.

“The single most startling number in the July retail sales report was the 1.5% jump in the building materials component, the best performance in the sector since January,” Pantheon’s Shepherdson said. “But don’t be fooled; this is noise, not signal. The monthly data are erratic, but the trend is clear.”

“In short, the worst is yet to come for housing-sensitive retailers,” he said. “Their sales will fall even as other retailers and providers of domestic services benefit from the rebound in discretionary incomes now underway as gas prices drop and payrolls continue to rise rapidly.”