The battle against inflation continues as the Federal Reserve maintains a vigilant stance on economic activity. In this update, we explore the latest developments, key events, and the crucial role of the Core Personal Consumption Expenditures (PCE) Price Index in shaping monetary policy.

Economic Overview: The Federal Reserve acknowledges robust economic expansion, with job gains remaining strong but moderating. Inflation, although having eased in the past year, remains elevated. The federal funds rate has been steady at 5.25% to 5.5% since July 2023, with expectations of potential rate cuts later in 2024.

Inflation Insights: The latest Consumer Price Index (CPI) report reveals a 3.1% increase, slightly surpassing expectations. Core CPI, excluding food and energy, stands at 3.9%, marking the lowest since August 2021. Shelter costs, a significant factor, contribute to sustained inflation, while food-at-home inflation remains low at 1.2%.

Housing Market Impact: Despite the U.S. economy adding 2.7 million jobs in 2023, the housing market faces challenges. Mortgage rates have plateaued, impacting total home sales. November 2023 saw a 1.2% decrease in sales compared to October and a 6.2% decrease from November 2022.

Upcoming Key Events: This week's focus includes New Home Sales, CB Consumer Confidence, US Q4 2023 GDP, and January PCE Inflation data. Additionally, 12 Fed speaker events will provide insights into future monetary policy.

Federal Reserve Meeting Recap: Minutes from the January meeting indicate the Fed's optimism about the effectiveness of policy moves in reducing inflation. Fed members emphasize a cautious approach, waiting for more data before considering rate cuts. The Core PCE, the Fed's preferred inflation measure, declined to 2.9%, but upcoming reports will be crucial in shaping future decisions.

Why PCE Matters: The Core PCE Price Index, excluding volatile food and energy prices, guides the Fed's monetary policy. A forecasted 0.4% increase in January could maintain the 12-month rate at 2.9%. A lower-than-expected PCE could positively impact the bond market and mortgage rates.

As the economic landscape evolves, staying informed about inflation trends, key economic indicators, and Federal Reserve strategies is crucial. All eyes are on the upcoming PCE report to gauge the trajectory of inflation and its implications for the broader economy. Stay tuned for a comprehensive analysis after Thursday's release.

HOME PRICES AND INVENTORY

Goldman Sachs’ “U.S. economic analysts” team revises up its multi-year outlook for U.S. home prices, as measured by Case-Shiller: +5.5% in 2024 +4.4% in 2025 +4.9% in 2026 +4.9% in 2027 As reported by Lance Lambert of ResiClub, these have been revised since July 2023. The predictions were as follows:  +1.3% in 2023  +1.7% in 2024  +2.4% in 2025 +3.8% in 2026 Nationally, as of January 2024, US home prices in the top 50 metro areas, are up 0.5% month-over-month, and 6.7% year-over-year.

This week, more homeowners listed their properties for sale, with new listings seeing the biggest jump in two months. However, high mortgage rates are still keeping many buyers away. New home listings increased by 10% compared to last year, and sale prices rose by 6%, the largest rise since October 2022. Despite more homes being available, buyer activty is low. Mortgage applications dropped by 10% from last week as average mortgage rates went above 7% for the first time since mid-December. Pending home sales are also down by 7% from last year, continuing a trend seen since mid-January. Buyers who are in the market are mainly looking for homes that are ready to move into, as they don't want to spend extra on repairs and renovations on top of already high monthly payments. Real estate agents suggest that sellers might need to offer some financial incentives to attract buyers in this high-rate environment. But that depends on the market you’re in.  Last week, in the Bay Area (CA), my buyers were outbid on properties over $1M with more than 20 competing offers. If the home is in a good location, priced well and turnkey, concessions aren’t an option.  If you are looking to score a seller credit, or price reduction, target homes on the market 2-3 weeks with no offers.

Mortgage rates wield considerable influence over both homebuyers and sellers, shaping market dynamics and affordability. The lock-in effect is evident, keeping sellers hesitant and inventory levels constrained. While buyers secure approvals, they may not always follow through with offers, influenced by shifts in mortgage rates.

It's clear that interest rates won't revert to their historic lows below 3% without significant economic upheaval. Consequently, the pressing question arises: what measures can be taken to enhance home affordability?

The reality is stark: to drive prices downward and foster affordability, we would require more than double the existing inventory to surpass buyer demand. This underscores the challenge of balancing supply and demand in today's housing market.

In the midst of these dynamics, it's crucial to recognize that the optimal time to purchase a home is when it aligns with your financial capacity. While market conditions fluctuate, ensuring that your purchase falls within your means remains paramount.

Today's Rate: 7.09% (This is based on a nationwide average, on a 30 year fixed conventional loan)

Indeed, the present juncture offers a window of opportunity for prospective homebuyers. As we navigate the complexities of the housing market, the key lies in making informed decisions that prioritize long-term financial well-being.