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The promise of lower rates to come is having a mixed effect on the housing market. Mortgage rates are down over 100 basis points since October and are at the lowest level in eight months. This has been enough to push homebuilder sentiment up by seven points in January, the largest one month increase in nearly a year. The drop in rates is increasing affordability and bringing buyers back to the new home market. The story is different for existing home sales. Lower mortgage rates have created the lowest level of inventory in almost a year – no one wants to exchange a 3% mortgage for one close to 7%. The lack of inventory has pushed prices up 4.4% from December a year ago. Sales of previously owned homes, which account for the majority of home sales, fell 1% in December and were down 6.2% year-over-year. The number of homes sold in 2023 was 4.09 million, the lowest level since 1995. At that time, the average home price was $114,600 compared to $382,600 today.
Key Indicators this Week
Retail Sales – The 2023 holiday shopping season ended brighter than expected. Retail sales soared 0.6% in December, the biggest gain since September last year. Ex-auto sales were up 0.4%, also the biggest rise since September. Sales in 9 of the 13 categories increased, with the biggest gains in clothing, general merchandise (including department stores) and e-commerce. Motor-vehicle sales were up 1.1%, matching the biggest increase since May, making it another “December to remember.” Total holiday sales rose 3.8% from a year ago to $964 billion. Prior to the Covid-19 pandemic, average sales growth during the holiday season was 3.6%. The data suggests the consumer remains resilient.
Beige Book – The latest Federal Reserve’s Beige Book was – at best – neutral. A collection of anecdotes about business conditions in each of the 12 Fed districts, the report pointed to strong consumer spending for keeping the economy growing in the final weeks of 2023. Most districts reported “as expected” holiday consumer activity, while three districts, including New York, exceeded expectations. Manufacturing was weak across the country. Nearly all districts cited signs of a cooling labor market with wage growth to falling.
FedSpeak – All it took was a couple of key Fed officials to offer opinions on possible rate cuts for Treasury yields to turn around. Federal Reserve Governor Chris Waller was the first to take the steam out the markets’ hopes for a rate cut in March. Waller said the timing and number of cuts this year will depend on data and confidence that the 2% inflation target is sustainable over time. Federal Reserve Bank of Atlanta President Raphael Bostic backed up Waller’s comments, saying he wants to see more evidence that inflation is on track toward the central bank’s 2% target. “My outlook right now is for our first cut to be sometime in the third quarter this year and we’ll just have to see how the data progresses,” Bostic told his audience in Atlanta.
Rate Update – Good news is bad news, at least for the bond market. The consumer is spending, which keeps the economy growing. Consumer confidence is at the highest level since 2021, according to the latest University of Michigan sentiment index. While the Fed is surely happy the economy has not fallen into a recession, the good news prevents the Fed from lowering interest rates for fear inflation will heat up again. The financial markets came to terms this week that the Federal Reserve may not be cutting rates as much or as fast as hoped. Add to that higher than expected December consumer inflation numbers and the Fed has every reason to remain patient. Treasury yields are more than 20 basis points higher from a week ago.
Sarina Freedland – Senior Investment Officer
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