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High interest rates and high prices continue to plague the housing market. Sales of existing homes, which account for the majority of all home sales, fell 4.1% in October. This was the fifth monthly decline in a row and the eighth drop this year. New home sales declined 5.6%, the second largest drop this year. Pending sales, a measure of signed contracts, fell 1.5% to the lowest level on record. The lack of available homes to buy is especially evident in the existing home market where the number of previously owned homes for sale was the lowest for any October on record. Less inventory is leading to bidding wars similar to what buyers experienced during the pandemic – a third of the homes sold in October were above asking price, indicating multiple offers are still occurring. The inventory crunch and bidding situation is occurring mostly in starter and mid-price homes, where demand is greatest. The median selling price of an existing home is 3.4% higher from a year ago and is the highest since 1999. Even new home prices, while 17% lower than October 2022, remain well above pre-pandemic levels. Activity in the new home market is strong, even with higher prices, simply because there are more homes to choose from. Builders are benefitting from the fact that almost no one with a 3% mortgage rate is willing to move and give up a great rate. The inventory of new homes increased for a third month to the highest level since January 2023.
Key Indicators this Week
Income/Spending – The first look at spending in the fourth quarter was as expected, lower. Personal spending on goods and services rose 0.2% in October, a sharp decline from the 0.7% rate in September. Incomes rose 0.2% in October, half the pace of the prior month and the slowest pace this year. Economists expect spending to be subdued as we close out 2023, given the persistent high cost of goods and services. While some progress is being made with inflation (year-over-year core PCE is 3.5%, the lowest since April 2021) consumers continue to feel the pinch of higher prices in everyday goods and services.
GDP – The economy grew 5.2% in the third quarter, faster than the original estimate of 4.9% and the best performance in almost two years. Business investment, which includes structures, equipment and intellectual property, was the leading factor for the upward revision in GDP, increasing 1.3% versus the original 0.1% estimate. Another boost to growth came from a 5.5% jump in government spending. Consumer spending, which accounts for more than two-thirds of GDP, was revised lower from 4.0% to 3.6%. Despite the change, consumption in the third quarter was much stronger than the 0.8% gain in the second quarter.
Fed Preview – The next FOMC interest rate decision is December 13, less than two weeks away. As the lock-out period approaches, Fed members took this week to share their thoughts on the economy and interest rates. While all officials who spoke reiterated the pledge to remain vigilant until inflation reached the 2% target, most of the comments leaned toward the idea that interest rates may be as high as they need to be. The statements that stood out included “…increasingly confident that policy is currently well-positioned to slow the economy and get inflation back to 2%,” interest rates are in a “very good place,” and the decline in inflation “has been encouraging.” While no official, including the Chair himself, was willing to discuss rate cuts, the financial markets interpreted the milder comments as suggesting a rate cut could happen as soon as March. The question remains – who is right?
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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