If you sift through the economic data to try to discern if the Fed is more or less likely to start cutting short-term interest rates soon, you'll likely find items that suggest that rates should be lowered soon and others that don't. For example, progress on inflation, more modest economic growth and slowly loosening labor conditions all might suggest that rates should soon be lowered. Conversely, still-low unemployment, higher-than-desired price pressures and mostly solid (if unspectacular) economic growth suggest that there is little need for lower rates now, or perhaps even very soon.
Housing starts declined by 4.3% in December, sliding to a 1.46 million (annualized) rate. Starts for single-family homes dropped off by 8,6% to a 1.027 million pace, although this is a bit faster than that seen during the summer and early fall. Multifamily starts moved in the other direction, rising by 8% for the month to a 433,000-unit level. Permits for future residential building projects were also 1.9% higher overall, lifted by a 1.7% increase for single-family homes and a 1.9% rise for multi-family projects. Builders seem to be anticipating at least some pick-up in demand for new homes this coming year even as they are running discounts and financing incentives to move homes now.
Homebuilders were considerably more optimistic in January than they have been in months. The National Association of Home Builders Housing Market Index managed a five-point rise to 44 for the month, the highest this indicator has been since September and now up 10 points over the last two months. The measure of single-family sales activity strengthened by 7 points to 48, closing in on the par level of 50, while optimism about sales conditions over the next six months popped well above that with a 12-point increase to 57. Potential customer traffic at model homes and sales offices remained soft, as even with a five-point increase it only rose to 29 for the month, still quite weak... but it is winter, after all.
Sales of existing homes were down slightly in December. declining 1% to a 3.78 million annual pace. December sales are reflective of demand conditions some 30-60 days prior; mortgage rates had begun to decline in early November and had retreated by only about a half percentage point by the end of it. Further declines in rates during December should help strengthen demand somewhat more, but there isn't much supply of homes available to meet that demand. The National Association of Realtors reported that there is just a 3.2 months’ supply of homes to buy even with the further-diminished sales pace. While the median price of homes sold in December continued a typical seasonal decline last month it was 4.4% above December 2022. The spring housing season kicks off soon, but conditions don't promise to be much better than they were to start 2023, so expect measured market activity at best.
Lower mortgage rates continue to attract at least some homebuyers and homeowners to jump into the market for loans. The Mortgage Bankers Association reported that requests for mortgage credit rose by 10.4% in the week ending January 12, lifted by a 9.2% increase in applications for loans to purchase homes and buttressed by a 10.8% lift in those seeking to refinance existing mortgages. To be sure, activity levels remain low for both expressions, but the overall and purchase indexes are at about a six-month high, while the refinancing gauge has moved up to about eight-month-ago levels. It'll take lower rates still to move the refi index much, but purchase activity may improve a bit as some potential homebuyers look to get a jump this winter before the spring competition heats up.
At least now, there's enough forward momentum in the economy overall as to suggest little need for lower rates, at least very soon. While we would have expected to see more Fed officials trying to nudge investor views to align with their own more closely, that hasn't much been the case, at least as yet. Dr. Raphael Bostic, President of the Atlanta Fed and a voting member of the FOMC this year, spoke this week; he offered that he thought the first cut in rates might be appropriate in the third quarter, so sometime between July and September. If that turns out to be the case -- a move at the July meeting, for example -- it would leave only three additional Fed meetings to change policy in 2024, so it may be that the first verbal salvos to rein in market expectations for rate cuts this year has begun. The "blackout period" for Fed speakers and speeches for the upcoming January 30-31 meeting started on Saturday, January 20th, so no more comments will come from Fed members until early February. As such, we'll have to wait for Chair Powell's post-meeting press conference to see if pushback comes.
Between now and then, we have a week of data due out for markets to digest, including the update on GDP for the fourth quarter, new home sales, pending home sales for December and the Fed's favorite price measures for December, too. Although those observations will of course influence interest rates, the most important ones will come after the Freddie Mac survey has already been released for the week. Given where influential yields ended last week, we'd expect to see a modest increase in the average offered rate for a conforming 30-year FRM, likely enough to wipe out this week's six basis point decline and perhaps a bit more. Regardless, mortgage rates are just drifting along this January.
