Market Review - March 27, 2024

Market Review - March 27, 2024

The March meeting for the Federal Reserve has now come and gone, but the message remains roughly the same. In fact, the official meeting-closing statement was nearly unchanged from the one in January with just a few words regarding moderation in hiring trends omitted.

After a couple of inflation readings that were surprisingly high to start the year, there was perhaps a little concern among investors that the Fed's December projection for three rate cuts this year might be adjusted downward. However, when the updated Summary of Economic Projections from Fed members was released, the outlook for monetary policy remained unchanged and still forecasting three cuts in rates to come this year.

Mortgage rates that fell by more than a percentage point through December ignited existing home sales a bit. The National Association of Realtors reported that closed sales in February rose by 9.5% compared to January, landing at a 4.38 million annual pace, the fastest homes have sold since last March. There was an increase in the actual number of homes for sale during the period; however, the increase of 5.9% to 1.07 million homes available was overcome by stronger demand, so the available inventory-to-sales ratio retreated to just 2.9 months of supply at the current rate of sale. By this measure, the inventory of homes for sale is now the thinnest since last April.

The sizable bump in homebuyer demand and more muted bump in supply helped lift home prices again. The median price of a home sold in February was 5.7% higher than those sold in February last year, and the typical seasonal decline for home prices was both shorter and shallower than normal this year. By way of comparison, from the record $413,800 peak in June 2022 the seasonal price decline through January 2023 was 12.7% to $361,200; however, from the second highest all-time mark last June of $410,100, the decline through January of this year was only 7.7% to $378,600. As such, it seems increasingly likely that we'll see new record high existing home prices by the time the typical June peak sales are tallied. Unfortunately, there are few expectations that mortgage rates will be low enough by then as to provide much by way of offset to help maintain affordability.

Tight existing housing market conditions mean opportunities for the nation's home builders, and they are increasingly happy about their prospects. The National Association of Home Builders released this week its Housing Market Index for March, and a fourth consecutive increase in this indicator was seen. What's more, the top-line figure moved above the par level of 50 this month, landing at 51; while still just barely positive, the value was nonetheless the highest since last July. A sub-measure tracking sales of single-family homes moved up four points to 56, a solid standing, while expectations for sales conditions in the next six months pushed a little deeper into robust territory with a two-point rise to 62. All this enthusiasm came even as traffic at model homes and sales offices remained weak, although the two-point increase to 34 did leave this measure at its highest spot since last August.

Builders are likely also cheered by increasing construction activity. After a rather soft January (likely weather-related), construction on new residences rose by 10.7% in February, rising to a 1.521 million annual rate. Single-family housing starts led the way, flaring higher by 11.6% to a 1.129 million annual pace while the smaller multi-family sector saw an 8.3% gain to a 392,000-unit level. Permits for future activity were already high, but also managed to increase as well, with overall housing construction permits rising 1.9%. Adding more supply to the nation's housing stock will ultimately help ease the tightness in housing markets, but this will take both time and continued favorable conditions for builders to take place.

Applications for mortgage credit declined by 1.6% in the week ending March 15. The Mortgage Bankers Association reported a 1.2% decline in requests for funds to purchase homes and a 2.5% drop in those to refinance them. With mortgage rates even firmer this week than last there likely won't be much improvement seen for this week either, but an expected settling of rates as the month winds to a close may perk up borrower demand a little.

Mortgage rates ran up a little bit coming into last week on concerns that recent inflation reports might change the Fed's thinking. While overall that doesn't appear to be the case, this does lend somewhat more weight to updates on prices when then do come. Next week the PCE price indicators for February are due out, but it's a given at this point that they won't be all that favorable, at least if the February CPI, PPI, and other inflation reports are any indication. While the PCE update cannot be completely discounted, it's the March and April reports that will hold more sway over rates as we move more deeply into the spring.

More immediately, though, the bit of relief that the Fed didn't significantly change its outlook for policy has allowed the yields which underpin mortgage rates to settle back a little bit over the last couple of days. Based on this, we think there will be a six-to-nine basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac when Thursday rolls around.

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