Something’s got to give – Prices or Rates?
After a surprising jump in December, economists expected that pending home sales (signed contracts for homes) would continue to increase in January.
Instead of growing 1.5%, they shrunk ~5%.
Another surprise to economists this week was the drop in consumer confidence.
Since the Fed began raising rates, consumer confidence has remained strong amidst a record setting spike in interest rates and persistent inflation in core consumer goods.
The stubbornly strong consumer is the reason people are finally coming around to the idea of a “soft landing” for the Federal Reserve’s interest rate policy.
As we emerge from the supply and demand shocks of COVID-19, housing supply has begun to normalize.
Supply of existing homes still has a little more room to go, but with many homeowners feeling “locked-in” with rates so high, it’s likely that a drop in rates will free up some normal movement that creates supply.
Builders have stepped up massively since the industry shrunk post-2008, and with supply chain issues having subsided, we’re seeing higher levels of supply for new homes.
Home prices have continued to increase due mostly to low inventories as sales also remain low. However, there are also many anecdotes of builders shifting price cuts to financing in order to maintain the property values on their new builds.
This recent drop in pending sales matches up with an uptick in mortgage rates and a drop in MBA purchase apps, evidence of a hyper-sensitive consumer.
So, if rates don’t come down soon, prices gains might slow or reverse.