KEY DATA: Confidence: -0.3 pts, Present Conditions: +13.4 pts, Expectations: -8.8 pts/ Home Sales: -5.9%; Prices (Over-Year): +20.1%/ Case-Shiller (Over-Year): +13.2%; FHFA (Over-Year): +13.9%
IN A NUTSHELL: “Some concern about the future is creeping into the minds of consumers.”
WHAT IT MEANS: Eventually, the massive growth rate will have to moderate, and it looks like households are expecting that to happen during the next six months. The Conference Board reported that its Consumer Confidence Index was largely flat in May. However, the details were surprising. The Present Situation component soared, as respondents were quite happy about what is happening right now. But they were not quite as sanguine about the future. Households are concerned that both business activity and the labor market could cool going forward. That is quite likely, but the resultant growth rate should still be solid.
Home sales may already be moderating. Like the existing home report, new home sales backed off in April. Of the four regions, demand was up only in the West. But prices continue to soar, even with inventory starting to build. As is the case with existing homes, the supply remains about two-thirds of what it needs to be, given the sales pace.
Speaking of housing costs, two indices were released today and they both said the same thing: Prices are still soaring. Both the Case-Shiller and Federal Housing Finance Agency’s (FHFA) national indices jumped in March and the year-over-year price gains continued to accelerate. Every region in the FHFA index was up double-digits since March 2020. Of the 20 major cities in the Case-Shiller measure, only Chicago posted a single-digit increase (9%). The home price inflation is accelerating across the nation. IMPLICATIONS:The housing price increases are showing no signs of easing up and if you talk to realtors, they don’t think it will for quite a while. It’s unclear how long “quite a while” is, but it looks like conditions will stay strong into the fall. What may be at risk is sales. The rapidly rising prices are starting to impinge on affordability and if mortgage rates rise as inflation accelerates, then some buyers, especially first-time home buyers, could be forced out of the market. Continued double-digit, or even high single-digit home price increases are not healthy, and we need to start considering what it will take to start calling this a bubble. I am not prepared to do so quite yet. This is not a speculators housing market, as most purchasers are homebuyers, not investors. And most of the homebuyers have the incomes to afford their purchases. It looks like both the lenders and regulators learned their lesson from the housing bubble and are not stretching things to the limit. The market is likely to decelerate, not burst, and if that happens, the impact on the economy will not be major. (Yes, Mr. Bernanke said the same thing fifteen years ago, but conditions are somewhat different right now.) What is disconcerting is seeing consumer confidence slowing its rise. Let’s see now, economic activity is getting back to where it was before the pandemic hit, the vaccines have allowed the economy to largely reopen, and job growth is really strong. So why aren’t people more exuberant?I am not sure, but we might want to start blaming inflation. It is spreading and both consumers and business owners are seeing it up close and personally. The Philadelphia Fed published a report today that showed that inflation expectations are jumping. Respondents thought inflation would rise at a 4% pace not just in the next year, but also over the next ten years. This mirrors, to some extent, the finding of the Atlanta Fed, which saw its business inflation expectations measure hit its highest level since it was created nine years ago. Inflation expectations may be starting to lose its anchor, which is the Fed’s greatest nightmare. Since both of those measures come from Fed-based research, Chair Powell is likely taking note.