A Great Week for Rates

This week had some important housing news that gives us hope of a brighter future. 

• Fed speakers and minutes gave us an insight into the minds of policy makers on the future of rates. 
• This was overall a great week for rates and hopefully it continues into next week’s important Personal Consumption Expenditures (PCE) inflation report. 
• We saw an improvement of about 50 bps or about .25% in rates.

Fed Commentary: No Major Concerns About Inflation

Monday was the President’s Day federal holiday, so markets were closed.  Despite the holiday, Federal Reserve (Fed) Governor Waller spoke and gave some love to interest rates.

• He wasn’t concerned with the hotter-than-expected Consumer Price Index (CPI) report that came out last week. He said that it was likely seasonal and a normal expectation to see a slight rise.
• He was also not too concerned by the threat of possible tariffs. He stated that the effect on inflation would be a one-time price increase and would not be hamper the Fed’s work on inflation.
• Waller is considered a likely contender to take the top Fed job at the end of Chairman Powell’s term in 2026, so his words carry a great deal of weight with markets.

Philadelphia Fed President Harker also made very similar comments on Wednesday morning.

• He was not concerned with the January CPI report and noted that 9 out of the past 10 years have seen surprise upticks in inflation in the January report. He acknowledged that seasonal adjustments in the data analysis may not be keeping up as the economy changes quickly.
• He wasn’t overly concerned with tariffs, either. He reiterated that as inflation comes down further, the Fed will cut rates.

The bond markets loved both these speakers.

NAHB Housing Market Index: Tariff Concerns Impact Sentiment

The National Association of Home Builders (NAHB) Housing Market Index came out for February. The index showed that sentiment (outlook) fell 5 points over concerns with tariffs, housing costs, and elevated mortgage rates.

There was an interesting phenomenon that shows how sensitive these economic reports are to real-time events: 

• The survey went out at the beginning of February. 
• Respondents who answered at the beginning of the month showed a reading of 38 (lower is worse confidence in the future) but then President Trump delayed tariffs on Canadian lumber. 
• Respondents who answered after the delay showed a reading of 44. 
• This definitely influenced the results of the index.

Housing Starts and Permits: Decline After Strong December

Housing Starts and Permits give a good indication on future housing supply and can influence home values and rents. Headline Housing Starts fell 10%, with single-family down 8.4%. This would seem to be a bad number but on closer inspection, we can see that this decline is following one of the best numbers in all of 2024: December. 

Looking at the numbers from a yearly basis, single-family starts remain fairly stable over the past couple years. 

Remember, single-family housing is still not keeping pace with family formations. This is contributing to the affordability challenges being faced by many home buyers, especially first-time buyers.

Fed Meeting Minutes: Balance Sheet Adjustments Benefit Rates

The Fed prior meeting minutes gave rates a nice improvement. The Fed said they planned to end their balance sheet runoff in the middle of 2025. 

The Fed owns significant holdings of US Treasury debt and Mortgage-Backed Securities (MBS). Think of these as loans like car loans or mortgages in that they have a finite end date. When that date is reached, the debt is gone and the money “runs off” the balance sheet. 

Currently, the Fed has slowed the pace at which they allowed assets to runoff their balance sheet. They would take the proceeds and reinvest them back into newer US Treasuries and MBS. This created demand and helped to push rates down. 

Because they are indicating they will stop all runoff, that means they will take all the proceeds and purchase even more debt. This is great news for rates and the market has been getting better.

Existing Home Sales: Seasonal Decline but Strong Annual Growth

The week ended with January’s Existing Home Sales data. Since existing homes are the largest volume of homes in the country, this report is very important. 

This report reflects actual homes that likely went under contract and were on the market in November and December. January showed it was down 4.9% MoM to an annualized pace of 4.08M units. 

• This was just slightly under expectations of 4.12M. YoY it was still up 2%. November and December are usually a slow time of the year for home sales with holidays and poor weather, not to mention that rates jumped back up. 
• This is still a very good number for this period. Median home prices came in at $396,900, down 1.68% MoM but still 4.8% higher YoY.    

On the inventory side of things, this report showed an increase of 1.18M units, up 3.5% MoM and up a huge 16.8% YoY. 

• Comparing to January 2020, prior to Covid, we are still down 17%. 
• This does give us a 3.5 months’ supply compared to a normal market at 4.6 months. 
• Days on the market increased to 41 days compared to last year’s 36 days. 
• 15% of homes sold over the listing price.

As we discussed above, there is still an imbalance with supply and demand.  Inventory can’t keep up and is buoying home prices. 

The housing market could get even stronger with a decline in interest rates. Even Lawrence Yun, chief economist with the National Association of Realtors (NAR), stated that NAR’s forecast is for 7-12% existing home sales growth in 2025 and another 10-15% in 2026.

QCEW Data: Job Market May Be Weaker Than Reported

Last but not least, the preliminary QCEW (Quarterly Census of Employment and Wages) data for Q3 2024 came out. This report is very much lagging but is much more accurate than the monthly Bureau of Labor Statistics (BLS) Jobs report. 

The QCEW showed 740K fewer jobs were created than the BLS reported. This equates to an overstatement of 62K jobs each month even after the two revisions that each BLS report goes through. Imagine if the monthly jobs reports last year were each 62K less how rates would have reacted.

Looking Ahead

 

Next week finds us with several very important reports. Here’s what to keep an eye on:

Tuesday, February 25:

• FHFA House Price Index
• Case-Shiller Home Price Index

Wednesday, February 26:

• New Home Sales

Thursday, February 27: 

• Initial Jobless Claims
• GDP
• Pending Home Sales

Friday, February 28:

• Personal Consumption Expenditures (PCE) 
  the Fed’s favorite measure for inflation

 

Let’s hope we continue the rally in interest rates. PCE could definitely push us lower.