Reports out Thursday showed home sales declined and the economy facing some tailwinds.
A pair of economic reports on Thursday showed the economy continues to encounter tailwinds as it battles high interest rates and inflation.
Existing home sales fell 4.3% in March after February’s strong increase, caught in a vise of mortgage rates at 7% and median prices that rose 4.8% from a year ago, the National Association of Realtors said.
“Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves,” said NAR Chief Economist Lawrence Yun. “There are nearly six million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.”
Separately, the Conference Board’s leading indicators index declined 0.3% in March following a 0.2% gain in February. However, the six month drop of 2.2% was smaller than prior six month declines of 3.34%.
“February’s uptick in the U.S. LEI proved to be ephemeral as the Index posted a decline in March,” said Justyna Zabinska-La Monica, senior manager, business cycle indicators at the Conference Board. “Negative contributions from the yield spread, new building permits, consumers’ outlook on business conditions, new orders, and initial unemployment insurance claims drove March’s decline.”
“The LEI’s six-month and annual growth rates remain negative, but the pace of contraction has slowed,” Zabinska-La Monica added. “Overall, the Index points to a fragile – even if not recessionary – outlook for the U.S. economy. Indeed, rising consumer debt, elevated interest rates, and persistent inflation pressures continue to pose risks to economic activity in 2024.”
With inflation staying higher than anticipated for longer, markets have begun repricing their expectations of when the Federal Reserve might begin to cut interest rates. That now looks like late summer or early fall at the earliest, though some analysts are warning the Fed may not cut rates this year at all.
“We are firmly in the camp of no rate cuts in 2024,” said Michael Landsberg, chief investment officer, Landsberg Bennett Private Wealth Management. “While it’s unlikely to occur, there is actually a strong case to be made for the Fed to raise interest rates in 2024 given elevated inflation, low unemployment, high stock prices, bitcoin surging and the re-emergence of IPOs.”
“The Federal Reserve is once again in a very tricky situation and declared victory on inflation way too early in late 2023, and now it’s walking back that optimism given the undeniable re-acceleration of inflation that has been seen so far in 2024,” Landsberg added.
At the same time, real estate industry insiders say prospective homebuyers may be accepting that mortgage rates will remain high through the rest of the year, but that prices are still showing signs of appreciation.
“Mortgage rates tumbled from late October through mid-January, holding through early February at some of the lowest rates since May 2023,” said Danielle Hale, chief economist at Realtor.com.
“By mid-February, however, a pickup in inflation reset expectations, putting mortgage rates back on an upward trend, and more recent data and comments from Fed Chair Powell have only underscored inflation concerns,” Hale added. “Thus, these March home sales figures reflect a different set of expectations for the economy, inflation, and mortgage rates than buyers and sellers are likely bringing to the market today, and sales data over the next few months is likely to reflect the impact of now higher mortgage rates.”
Higher rates are not the only concern. Limited inventory of homes for sale, despite some recent improvements, are also crimping the housing market. New construction slumped in March.
Overall, consumers remain in an expansive mood and continue to spend. According to data from polling firm Ipsos, sentiment is stabilizing after a volatile four months in which inflation readings came in hotter and markets began showing volatility over the prospect of interest rates staying at elevated levels.
The index of current sentiment rose by 1% last month, Ipsos said, while expectations of the future economic environment declined by 0.1%.
“The job market has been pretty robust and pretty healthy,” says Chris Jackson, vice president and head of polling at Ipsos. But he notes that concern over personal financial well-being are being affected by inflation.
Jackson also says that polling reflects the partisan nature of the current political environment.
“There are huge differences between Republicans and Democrats, with Republicans much less positive than Democrats,” Jackson says.
