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Complicated Housing & Fed Preparation - April 23, 2019

“Sales of the Cheapest and Swankiest Homes are Tanking”

 It can feel a bit wonkish to enjoy sorting through data, but recently housing has been a treat. Our enjoyment comes from the potential for big revisions, covered in March, and the complex dynamics that are working under the surface. One example is the fall of both low and high-priced existing home sales. In an article for CNBC Diana Olick writes, both extremes of the housing spectrum are “tanking, but for very different reasons”. In an echo of the dynamics covered by the St Louis Fed in their three-part series, Olick finds that though the lower-priced segment is facing supply issues as demand soars, builders are “not focused on the sector”. Meanwhile, sales of high-end homes, where supply is plentiful at “nearly a year’s worth”, are dropping as buyers are dealing with tax law changes. Jessica Lautz states in the article, “everyone is nervous about what’s happening right now with SALT” and suggests that the market will have to wait “and see how much of an impact that is going to have on the high end of the market.” Lawrence Yun, Chief Economist at the NAR, also pointed to problems arising from tax policy changes, suggesting “[t]he expensive home market will experience challenges”.

Another interesting dynamic is the difference between new and existing homes. While the NAR reported a 5.4% YoY decline in existing home sales, new home sales rose 3% YoY, “confounding expectations”. According to an article from Mamta Badkar at the Financial Times, the new home sales numbers, the highest since November 2017, signal “healthy demand for newly built homes in the key spring selling season”. Conversely, while the median price for an existing home was up 3.8% YoY, the median price of a new home was down nearly ten percent, falling 9.7% YoY. While these differences are likely due to the composition of new homes, as discussed above, we will be watching to see if homebuilders are able and willing to adjust.

 “That Means Cutting Interest Rates Now

 Back in January, we wrote about the Fed’s dovishness as both Powell and regional Fed president alike commented on the Fed’s ability to be “patient”. Now, with next week’s FOMC meeting looming on the horizon, there has even been talk of an outright cut. This wouldn’t be surprising coming from Trump, but this time, it is ex-Minneapolis Fed President Narayana Kocherlakota cooing. In “The Fed Needs to Fight the Next Recession Now”, Kocherlakota argues that the fed “needs to be much more aggressive in using the limited tools that it has” and should cut rates “to lower the unemployment rate even further”. While markets are pricing in a 0.0% chance of a cut for the next meeting, they are pricing in a 19.8% chance of a cut at the meeting in June. Prepare to jibe?