PMC Weekly Review - March 27, 2015

A Macro View – The Fed’s Conundrum: The Housing Market

Last week’s Federal Reserve (Fed) meeting shed little additional light on when exactly the Fed will implement rate hikes, but most economists continue to anticipate rates will increase later this year. Aside from the primary areas the Fed focuses on (GDP, inflation, and employment), it recently emphasized that it is keeping a watchful eye on the housing market, based on its importance to the overall economy. Housing plays a crucial role in economic progress, primarily because it makes up a significant percentage of total assets held by the nonfinancial private sector. Further, the mortgage markets have an influence on monetary policy, and housing can create job opportunities as well as demand for building materials, furniture, and appliances, which can boost the economy. Although home prices have risen to pre Credit Crisis levels in some regions, the housing market recovery has been sluggish in others, despite historically low mortgage rates and an improving employment picture. In addition, there is concern over the lack of first-time buyers in the market. Earlier this week, readings from February’s existing and new home sales were released. Both figures were in positive territory, but they painted somewhat different pictures of what is happening in the housing market—adding further uncertainty to the state of the U.S. economic recovery. According to the National Association of Realtors, the busiest time of the year for home sales is the spring selling season (April through August), and considering this is right around the corner, the next couple of months are critical to the state of the housing market.

Sales of existing homes rose 1.2% last month from January, the National Association of Realtors said Monday. This leads to a seasonally adjusted annual rate of 4.88 million, and even though this marks a minor recovery from the prior month, these levels are still below pre-recession sales. Furthermore, this reading was below market expectations, and the major culpabilities appear to be lack of supply and the harsh winter weather. The shortage of existing homes on the market has led to a 7.5% higher median price from a year ago, making it very much a seller’s market. First-time homebuyers have been affected the most, and accounted for only 29% of existing home transactions in February. According to Reuters, economists and realtors highlight that existing home sales make up 90% of total home purchases in the U.S., and note that the number of first-time homebuyers should be above 40% to sustain a healthy housing recovery. The lack of first-time buyers also creates social problems in the U.S., as it widens the wealth gap.

The Commerce Department announced on Tuesday that sales of new homes surged roughly 8%, which was a welcome surprise, given the prior day’s news. This figure translates to an annual rate of 539,000 newly built homes with a committed sale, which is the highest level in nearly eight years. Moreover, there was a meaningful revision to the January reading: there were approximately 500,000 new home sales during the month, revised upward from 481,000 in December. While sales of new homes make up only 10% of all U.S. home transactions, these numbers are important when considering the struggles other parts of the housing market have faced early in 2015. In addition, new home sales provide significant gains to economic and job growth when compared to existing sales.

There are few concrete conclusions that can be drawn from this week’s housing market data points, but both figures indicate there soon could be a need for additional supply. It is hard to dispute that the investment world constantly surveys every possible move of the Federal Reserve. In fact, the major U.S. equity indices spiked last week after Ms. Yellen simply omitted the word “patient” from her statement following the Fed meeting. Considering this, the spring selling season undoubtedly will be followed closely by both market analysts and investors, given the meaningful role housing numbers could play in the Fed’s take on the economy and potential rate decisions.

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