Market Review - April 2, 2024

Market Review - April 2, 2024

The end of the first quarter of 2024 has come, and it is expected to be near the end of the second quarter before the first change in the federal funds rate occurs. Of late, investors seem to have somewhat less conviction than they had that lower rates will come in about three months' time; futures markets investors presently reckon just a 60% chance that the initial cut in rates will come in June.

Of course, a lot can change in three months, and to get to a place where a change in monetary policy can occur, we'll need to see some change in the pattern for economic growth, labor conditions and a more pronounced downward change in the trend for inflation.

At least for new home sales, the early spring housing season has started on a flat foot, or at least a little changed one. To be fair, February's really a pretty early start, but with housing markets as competitive as they have been, the most aggressive buyers are likely out in the market already. For February, the Census bureau reported that sales of new homes came in at a 662,000 annual pace, down just slightly from an (upwardly) revised 664,000 January rate. Of course, the 0.3% monthly decline may be revised away just as was January's initially reported monthly decline. What won't likely be revised away is that there are plenty of newly constructed homes available to buy, an annualized 463,000 units, good enough to be an 8.4-month supply at the present rate of sale. To keep new homes moving, builders have been using incentives and price discounts; in February, the median price of a newly built home was $400,500, down 7.6% from last February. Unlike existing home prices, which are high and likely to set new records again this spring, new home prices have retreated for a while, with the current median cost about 19% below October 2022's peak ($496,800) mark.

The pretty flat pace for new home sales in February was matched by a modest increase in signed contracts to purchase existing homes. The National Association of Realtors Pending Home Sales Index posted a 1.6% increase in February; in turn, and provided the offers make it all the way to closing, this may help lift existing home sales for March but more likely April by a little bit. Based upon the lag from a signed contract to a closing, we may see a modest dip in March closings (recorded sales) before an uptick for April, as January's PHSI posted a 4.7% contraction. Even with the modest February boost, the PHSI is about 7% below year-ago levels, so housing activity remains modest at best.
Rather unchanged for weeks have been initial claims for unemployment benefits. The week ending March 23 saw no deviation from the recent pattern, as 210,000 new applications for assistance were filed across the country. In the past eight weeks, this figure has been no higher than 213,000 and no lower than 200,000, so the pattern here remained at both a low level and one that is relatively unchanged for some time now. Such a pattern gives the Fed little reason to consider a change to rates, too.
With mortgage rates and home prices elevated, applications for mortgage credit have been trending generally lower with occasional upward flares. After such a flare in the week ending March 8, the next two weeks will have erased some of that gain, and in the week ending March 22 a 0.7% decline in mortgage applications was reported by the Mortgage Bankers Association. Requests for funds to purchase homes eased slightly, declining 0.2%, while those to refinance existing mortgages dropped back by 1.6%. After declining more than a percentage point from November to mid-February, mortgage rates have been somewhat firmer, bouncing around at levels above their recent bottom over the last few weeks.

Unless you're impatiently waiting for lower interest rates, there's nothing at all wrong with stability. The economy is performing, labor markets are stable and high, inflation is flat and firm, but could be lower. If you hope to see the Fed move sooner or more forcefully, we'll need to see some change -- a faltering in labor markets, a new and faster downturn for inflation, a darkening economic climate -- but there's little such indication that these kinds of pronounced changes are in the offing, at least in the near term. With this as a backdrop, all we can do is wait for the slow drip of change that's currently occurring to get to a place where the Fed is comfortable not only making the first change in short-term rates but also signaling that the path ahead will include more of them. Until we get to that place, or unless there is some other significant change in the economic or global climate, it's hard to expect that we'll see much change to mortgage rates.

There has been little actual trend for mortgage rates for some weeks now, and we'd expect that to continue next week. At least through the end of this week, indications are that we might see a 2-3 basis point decrease in 30-year fixed mortgage rates as reported by Freddie Mac when Thursday comes. The month and quarter have come to an end, so perhaps the new month and start of the new quarter will bring with it some change.

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