The week of January 15, 2024, brought mixed but cautiously optimistic news for the U.S. economy,
OPTIMISM IN THE NUMBERS |
The week of January 15, 2024, brought mixed but cautiously optimistic news for the U.S. economy, particularly in the housing and retail sectors. Home sales and construction experienced a slump in December, but there are signs of recovery on the horizon. Existing home sales fell to a 3.78-million-unit annualized pace, which was a decrease from November and also lower than December 2022. However, the National Association of REALTORS® predicts a rebound due to lower mortgage rates and increased inventory.
In the homebuilding sector, builder confidence improved, with the National Association of Home Builders (NAHB) Index rising significantly, driven by lower interest rates and some price reductions by builders. Single-family construction showed resilience, exceeding one million units for the second consecutive month, despite a slight decline from November. Future construction also looks promising, with building permits for single-family homes hitting a yearly high.
Retail sales exceeded expectations during the holiday season, rising by 0.6% from November to December and showing a 5.6% increase compared to December 2022. This uptick was fueled by spending in various sectors like department stores, car dealerships, and online retail, indicating a strong consumer economy.
Employment figures also brought good news, with initial jobless claims dropping below 200,000, the lowest since September 2022. This suggests a tight labor market, though the number of people finding it difficult to secure employment after being laid off remains a concern. Overall, the economy shows resilience with potential for growth in the housing market and retail sales, though challenges like low housing inventory and employment dynamics persist.
INFLATION IS COOLINGThe current sentiment regarding inflation is positive. Let’s take a look at the recent data. In December, the overall Consumer Price Index (CPI) saw a slight increase to 3.35%, but the core inflation rate, which excludes volatile food and energy prices, dropped to 3.9%, its lowest since August 2021. Compared to June 2022, when the CPI peaked at 9.1%, there have been significant year-over-year declines in several categories, notably Fuel Oil (-15%), Gas Utilities (-14%), Gasoline (-2%), and Used Cars (-1%). Apart from Transportation and Shelter, all major CPI components now exhibit lower rates than in June 2022. Shelter, constituting over a third of the CPI, significantly influences overall inflation trends. Its persistent rise has kept inflation elevated, but there's a notable shift recently. Excluding Shelter, U.S. consumer prices have risen just 1.9% over the past year, marking the seventh consecutive month below 2%. Shelter CPI has decreased year-over-year for nine months straight, dropping from a peak of 8.2% in March to 6.2% currently. This downward trend in Shelter CPI is expected to continue, which could further reduce inflation in the coming months, assuming other components don't spike. Shelter CPI, which has been catching up after previously understating housing inflation, shows a 21.0% increase since 2020, aligning closely with a 19.7% rise in asking rents. Additionally, food price inflation has decelerated significantly, with only a 1.3% increase over the past year, the smallest since June 2021. Other indicators also suggest a cooling of inflation. U.S. Producer Prices fell by 0.1% in December, with an annual increase of just 1%. U.S. Import Prices dropped by 1.6% year-over-year. Consumer and business inflation expectations are at their lowest in years, according to surveys by the New York Fed and Atlanta Fed, respectively. Gasoline prices and wholesale used car prices are also at their lowest since mid-2021. The Cleveland Fed anticipates a further decline in the headline CPI to 2.96% for January, potentially the lowest rate since March 2021, and a core CPI of 3.81%, the lowest since May 2021. Why does it matter? If you're looking for rate cuts, you have to pay attention to inflation. We are headed in the right direction. |
In December, the Federal Reserve hinted at three potential rate cuts in 2024, and market expectations have gone even further, anticipating six cuts in total. These expectations suggest the Fed Funds Rate could drop below 4% by the end of the year. This move seems to indicate the Fed's belief that the battle against inflation is winding down and that a return to the 2% inflation target is on the horizon.
However, there are concerns about the Fed's track record and whether this could be another policy misstep. In August 2020, the Fed was not worried about rising inflation and was focused on keeping policies relaxed to push inflation above 2% for a while. They said it was “transitory.” But when inflation surged to 9.1% in 2022, the highest since the early 1980s, the Fed's previous stance and its contribution to the inflation spike seemed to be overlooked. It’s hard to believe nobody knew a 0% interest rate environment would drive inflation through the roof.
Critics argue that if the Fed was serious about reducing inflation, it should maintain higher interest rates for a longer period to bring inflation below 2%, mirroring their earlier strategy in the opposite direction. Currently, prices are about 10% higher than they would have been if inflation had stayed at 2% from 2020 to 2023.
This raises the question of why the Fed is considering cutting interest rates now, especially with a low unemployment rate of 3.7%, relaxed financial conditions, and a stock market at peak levels. The decision to lower rates soon, without first allowing the inflation gap to close, is being questioned. As it should be.
Always remember, inflation is not just about buying and selling homes, its about families being able to earn enough to keep a roof over their heads and feed their families.
THE HOUSING MARKETHome sales in the U.S. are currently at their lowest since 2010, with the annual rate in December 2022 dropping to 3.78 million, even below the 4.01 million rate during the 2020 COVID-19 shutdowns. The total sales of 4.09 million existing homes in 2023 was the lowest since 1995. There are two main reasons for this decline in home sales:
Despite these challenges, home prices in the U.S. actually went up by 4% in 2023. This situation is favorable for homebuilders, who have gained a larger share of the market due to the scarcity of existing homes. Over the past five years, the homebuilders ETF (XHB) has seen a 184% increase, outperforming the S&P 500 ETF's 97% gain. The current deficit in single-family homes, estimated to be in the millions, suggests that there will be a continuing trend of increased homebuilding. We need the inventory. |
Buyer sentiment is good. Joseph Cacciapaglia said, “Just locked in a 6.625% interest rate for a new primary residence. It's a condo, which makes it slightly higher. Why are we buying a new home when rates are so high? It's the best deal that's come up in our school district in years. Rates are just one piece of the puzzle.”
As rates stabilize below 7%, buyers are hopeful, mortgage applications are picking up and offers are going out. The best time to buy, is when you’re buying within your means.
In the early 1980s, buying a home was actually less affordable than it is now. The most affordable time to buy a home was in 2013, as prices were still recovering from the Global Financial Crisis and mortgage rates were low. From 2009 to 2021, it was an exceptionally good time to buy a home in terms of affordability. The high affordability during this period contributed to the significant increase in home values. People were buying homes, and home values were rising. The current strain on affordability is due to higher prices and higher rates, a combination that may not go away. Rates will improve, but home prices will continue to rise. 2-3% rates are not coming back anytime soon.
MARKET MOVING NEWS THIS WEEK |
More housing news is ahead when December’s New and Pending Home Sales are reported on Thursday and Friday, respectively. Thursday also brings the latest Jobless Claims while the Fed’s favored inflation measure, Personal Consumption Expenditures, will be released on Friday.
In 2024, the Federal Open Market Committee (FOMC) of the Federal Reserve is scheduled to meet on the following dates:
January 30-31
March 19-20
April 30-May 1
June 18-19
July 30-31
September 17-18
October 29-30
December 10-11
These meetings are important events for financial markets as they often include decisions on monetary policy, including interest rates. The schedule is subject to change, and additional unscheduled meetings can occur if necessary.
WEALTH HACK OF THE WEEKI had the opportunity to work with Dr. Julie Gurner for a year. One of the most valuable insights I gained is the power of self-reflection and clarity. It involves taking the time to sit quietly with your thoughts, defining your goals with precision, and then wholeheartedly believing in your ability to achieve them. Consistent effort is key. This week, I'm excited to share a pertinent excerpt from her newsletter.
|
CALIFORNIA DREAM FOR ALLThe Dream For All Shared Appreciation Loan is a down payment assistance program for first-time homebuyers to be used in conjunction with the Dream For All Conventional first mortgage for down payment and/or closing costs. Upon sale or transfer of the home, the homebuyer repays the original down payment loan, plus a share of the appreciation in the value of the home. KEY CHANGES TO THE LOAN PROGRAM:
To be approved, apply now using the link below: |
CALIFORNIA DREAM FOR ALLThe Dream For All Shared Appreciation Loan is a down payment assistance program for first-time homebuyers to be used in conjunction with the Dream For All Conventional first mortgage for down payment and/or closing costs. Upon sale or transfer of the home, the homebuyer repays the original down payment loan, plus a share of the appreciation in the value of the home. KEY CHANGES TO THE LOAN PROGRAM:
To be approved, apply now using the link below: |
