KEY DATA: Sales: -7.2%; Over-Year: -2.4%; 1-Family: -7%; Condo: -9.5%; Prices: +15%/ Leading Indicators: +0.3%
IN A NUTSHELL: “The housing market may be softening, as rising prices and mortgage rates is starting to crush affordability.”
WHAT IT MEANS: If you are a seller, the housing market has been great. If you are a buyer, not so much. The big problem has been supply, but now we may be seeing declining affordability constraining sales. The National Association of Realtors reported that existing home sales dropped sharply in February. Demand for both single-family homes and condos plummeted. Part of the problem is the inventory of homes on the market. It is miniscule. The number did rise a bit, but it is so low that even if it doubles, it will still be low. The lack of supply is continuing to pressure prices. That hasn’t constrained buyers very much, as rates have been incredibly low. But that is starting to change. Mortgage rates broke the 4% level for the first time in nearly three years. Okay, that is not high on an historical basis, but first-time buyers who are at the entry income level are now getting priced out of the market since prices are up so much. The report noted that: “Monthly payments have risen by 28% from one year ago…”. And rates are still going up.
The outlook for the economy was a little more positive in February. The Conference Board’s Leading Economic Index posted a moderate rise in February, after having declined sharply in January. Can growth really accelerate with all the difficulties the economy is currently facing? That is not clear. The report noted that: “… the latest results do not reflect the full impact of the Russian invasion of Ukraine, which could lower the trajectory for the US LEI and signal slower-than-anticipated economic growth in the first half of the year.” The risks are that energy prices will remain high and the supply chain will take longer to untangle. And if China starts outwardly supporting Russia, who know what will happen? Consequently, I am not reading too much into the February increase.
IMPLICATIONS: Let’s see now, oil remains comfortably in the $100/barrel range and the secondary and tertiary impacts of the skyrocketing energy costs will not be felt for months. China is shutting down towns again as COVID is breaking out in parts of the nation and that could slow the process of untangling the global supply chain tangled. The Fed has embarked on raising rates and the former true believers of transitory inflation now fear the worst and have become rate-hike hawks. One regional bank president seems to want to emulate former Fed Chair Paul Volcker’s scorched economy strategy. Okay, maybe not the nuclear option, but we are likely in for rates hikes that are larger and get us to higher levels than this conservative, see-no-inflation-evil Fed ever signaled as being possible. The risk is that the Fed will repeat history and wind up jamming on the brakes. Unfortunately, the inflation cluelessness has put the central bank in a box and given Fed Chair Powell’s comment that you cannot have extended periods of strong job growth without price stability, the risk is to the upside on rate hikes. So now we have to ask the question, is a recession this year is possible? The answer is yes, though I still have the probability less than fifty percent. Of course, it was only twenty percent a couple of months ago, so it is clear conditions have changed dramatically. As for the markets, a fifty-point rate hike is distinctly possible at either the early May or mid-June FOMC meeting. That could be viewed as a sign the Fed is well behind the curve (it is), or that it is intent on curbing inflation (it is). Those alternative views imply different reactions from investors. Buckle up, we are likely in for some real volatility in the months ahead.