February 27, 2023 – Recent data releases all point to an economy that remains more resilient than many feared, and a housing market that is showing signs of modest improvement. The second reading of GDP in Q4-2022 was revised down, but the economy still expanded at a decent clip. New home sales posted a solid gain in January and listing activity picked up in early February. However, the latest report on personal income & outlays suggests the Fed’s intervention is far from over. Real consumption jumped higher at the start of the year, adding pressure to inflation. With financial markets adjusting expectations as the Fed keeps rates higher and for longer, mortgage rates rose for the third consecutive week.
REALTORS® get busy, but uncertainty clouds their outlook: According to C.A.R.’s monthly member survey, market activity is picking up steam as we move into the spring season. The share of members having listing appointments as well as those actually listing a property are both up from last month and last year. In fact, the share of those that indicated having a listing appointment in early February, was the 2nd highest in the last 16 months. Escrow activity also showed signs of improvement with 1 in 5 REALTORS® entering escrow in early February – likely as a result of low interest rates experienced during that time. However, expectations for sales in the near future remain below last year despite nearly doubling from January.
Mortgage applications retreat as rates continue trending upward: Despite the Fed trying to slow the economy in order to bring down inflation, the U.S. economy continues to show resilience. This is causing bond markets to reprice interest rates to account for the stronger than expected growth, tight labor markets, and the threat of sticky inflation. As a result, the 30-year fixed-rate mortgage (FRM) has been trending up for three consecutive weeks. Last week, the 30-year FRM averaged 6.50% – the highest since late November of last year. As a result, affordability will be affected, and some potential homebuyers have chosen to sit the sidelines as evidenced by a retreat in mortgage applications the last two weeks.
U.S. economy expands in fourth quarter, but at slower pace than previously estimated: The second estimate for Q4-2022 economic growth showed that gross domestic product (GDP) increased at an annualized rate of 2.7%. This was a downward revision to the initial 2.9% estimated last month and a deceleration from the 3.2% growth rate in Q3-2022. There were downward revisions to consumer spending, which had its weakest showing since the first quarter of 2022. Business spending also slowed as the economy lost momentum at the end of 2022. However, consumers boosted retail sales in January by the most in nearly two years, and employers added a surprisingly outsized number of new jobs. These signs of durability in the economy will likely force the Fed to continue raising rates to cool the economy and quell inflation.
Personal income increases giving consumers higher spending power amidst stubborn inflation: After adjusting for inflation, American households recorded a 1.1% increase in Personal Consumption Expenditures (PCE) in January. After showing signs of weakness at year’s end, consumer spending flipped around and rose more than expected in January. Personal income rose 0.6% in January, a higher uptick than the upwardly-revised 0.3% in December. Savings rates also rose for the fourth consecutive month to 4.7% – to their highest level in 12 months. Real disposable income also grew, which partly explains the strong consumption reports. However, as high prices persist and Americans’ purchasing power continues to erode, the Fed will remain aggressive in its monetary policy.
U.S. new home sales jump to 10-month high despite weakness in broader market: New home sales increased for the fourth straight month in January and had their best performance since last March, when they jumped 7.2% to a 670,000 unit pace. December’s pace was upwardly revised to 625,000 units, and meant that January was the second consecutive month where sales activity topped 600,000 units. However, January’s gain was driven mostly by a strong uptick (17.1%) in sales in the South. Across the rest of the country, sales for newly built homes dropped. Overall, new home sales are still depressed as they remain behind last year by 19.4%. With mortgage rates trending up once again, home builders will be pressured to continue offering incentives, like rate buy-downs and price reductions, to entice buyers.