Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

Read More

If you believe a ground hog can predict the weather, we should expect an early spring:  Punxsutawney Phil did not see his shadow when he emerged from his winter home this month.  On the other hand, this famous Philadelphia rodent is almost always wrong, so perhaps it’s best not to put away the parkas and gloves just yet.  We might also hope the housing statistics will be an equally inaccurate predicter of the market outlook, because early indicators have not been positive. 

Existing home sales began the new year as they ended the last one – on a downward trend – falling 1.2 percent below the December pace and 8.5 percent below January of 2018, representing the fourth consecutive year-over-year decline.  December’s annualized sales total of 4.94 million units was the lowest in three years.  Pending sales were a little brighter – up 4.6 percent compared with January, but still 2.3 percent below the same month a year ago.

New home sales posted a second consecutive month-over-month gain, beating November by 3.7 percent – but that was only because November’s outsized 657,000-unit annualized total was revised downward to 599,000 units. The Census Department hasn’t reported January sales yet, but Redfin estimates that they were 8 percent below January of last year, which would represent the fifth consecutive year-over-year decline. 

Glass Half Full?

It’s not easy to find anything positive to say about those numbers, but Lawrence Yun, the chief economist for the National Association of Realtors, managed this ‘glass-half-full’ observation:  Although existing home sales were “weak compared to historical norms,” he acknowledged, “they are likely to have reached a cyclical low.”  Translation:  The numbers are dismal, but they aren’t likely to get any worse.

Whether that represents a forecast or an expression of hope isn’t clear.  But Yun isn’t the only analyst who thinks lower interest rates, moderating home prices and a strong labor market  will buoy home sales this year. 

The February employment report was “disappointing,” in the opinion of analysts.  Employers added only 20,000 jobs – well below the 180,000 total they had expected, and nowhere near the blockbuster January tally of 311,000 workers.  Emphasizing the positives, economists pointed out that the job total, while anemic, nonetheless continued the streak of consecutive monthly gains (101 and counting).  Although average hourly earnings increased by only 0.4 percent, wages increased by 3.4 percent year-over-year, outpacing the cost-of-living.

Mortgage interest rates, which had pushed past 5 percent in November of this year, reversed direction in December and continued to decline in January, falling back to 4.43 percent, easing affordability pressures on buyers.  Slower increases in home prices have also  helped in the affordability area.  CoreLogic reports that prices increased by a negligible 0.1 percent in January compared with December and were only 4.4 percent higher compared with the same month a year ago, representing the slowest annual rate of increase in seven  years. 

Inventory Improvements

Inventory levels have also improved, reducing competition for scarce listings and  the resulting bidding wars that had forced prices higher. Redfin reports that only 13 percent of the offers submitted by its agents in January triggered bidding wars compared with 53 percent in the same month last year; Zillow reports that approximately 19 percent of homes sold in the second half of last year exceeded the asking price – a three-year low, according to the company’s calculations.    

Inventory improvements are a double-edged sword, however, increasing the number of homes for sale, but also reducing the pressure on buyers to purchase them.  "Buyers understand that the market is shifting in their favor and have become more sensitive to high home prices. That added sensitivity could continue to put a damper on the sales of new homes, which tend to be more expensive than comparable existing ones," Daryl Fairweather, Redfin’s chief economist, noted in a press statement. 

“Buyers and the sellers are in this dance right now where it’s a little harder to put deals together because nobody’s certain where the market is going to land,” Redfin CEO Glenn Kelman, added.  “It’s a little bit better than it was in the fourth quarter,” he told CNBC.  “We’re seeing stronger buyer demand, but it’s not as if people are willing to pay any price to get a home, which is what we saw at the beginning of 2018 and for the past four years before that.”

A Few Positives

Although housing reports have not been particularly upbeat of late, there have been some positive numbers, primary among them:  The homeownership rate has begun to increase (albeit slightly) and first-time buyers, who have been largely missing in action during the housing recovery, are playing a bigger role now.  They accounted for 2.07million purchases last year, the largest number since 2006, according to Genworth Mortgage Insurance Company. 

The increase in listings is also a positive indicator, analysts say, not just because it gives buyers more choices, but because it indicates that slowing sales and tamer price gains have not discouraged sellers. As one analyst observed, “Sellers have not taken their ball and gone home.”

The extent to which buyers and sellers will play ball this year will depend to a large extent on what happens to interest rates, and that remains an open question.  Explaining the Fed’s decision to leave rates unchanged in January, Federal Reserve Chairman Jerome Powell said uncertainty about financial markets and the global economic outlook counseled “patience” for the near term.  The lackluster January employment report may re-enforce that view.

In recent testimony to the Senate Banking Committee (before the February employment numbers were released), Powell noted:  "While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals….Financial markets became more volatile toward year-end,” he noted, “and financial conditions are now less supportive of growth than they were earlier last year….We will carefully monitor these issues as they evolve," he said.