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Week of December 16, 2024 in Review

The Fed cut rates, though they pared back their forecasts for additional cuts next year. Inflation was cooler than forecasted, while existing home sales moved higher and builders feel more optimistic about sales next year. Read on for these top stories:

·         Fed Cuts Rates 25 Basis Points

·         Fed's Favored Inflation Measure Tamer Than Expected

·         Existing Home Sales Rise for Second Straight Month

·         Home Builders Feeling Positive About the Future

·         New Construction Eased in November

Fed Cuts Rates 25 Basis Points

As expected, the Fed cut their benchmark Federal Funds Rate by 25 basis points, bringing it to a new range of 4.25% to 4.5%. This decision followed the 50-basis point cut the Fed made in September and the 25-basis point cut made in November. There was one dissent, as Cleveland President Beth Hammack preferred a pause to additional cuts.

Note that when the Fed cuts rates, they are reducing the Fed Funds Rate, which is not mortgage rates or even a long-term rate. The Fed Funds Rate is a short-term, overnight rate that banks use to lend money to one another, but it is the building block for all interest rates.

What's the bottom line?

Remember, the Fed began aggressively hiking the Fed Funds Rate to try to curb runaway inflation that became rampant after the pandemic. More recently, cooling consumer inflation and rising unemployment caused the Fed to begin this latest series of rate cuts. And while inflation has cooled considerably after peaking in 2022, the progress lower towards the Fed's 2% target has stalled in recent months.

This caused the Fed to be more hawkish in their latest forward guidance. Their "dot plot" of member forecasts signaled that two rate cuts are expected next year, down from four cuts forecasted in September, though these estimates can change quickly based on upcoming data.

Fed's Favored Inflation Measure Tamer Than Expected

November's Personal Consumption Expenditures (PCE) showed that headline inflation rose 0.1% from October, while the year-over-year reading rose from 2.3% to 2.4%. Core PCE, the Fed's preferred measure which strips out volatile food and energy prices, rose 0.1% monthly. The year-over-year reading held steady at 2.8%, remaining near the lowest level in over three years. All these readings were cooler than forecasts.

Among the categories within the report, tame readings for both shelter and healthcare contributed to this favorable data, which was reported on Friday after the Fed's meeting.

What's the bottom line?

While annual Core PCE did not decline further toward the Fed's 2% target, this was partly due to a lower replacement figure from November 2023, which was removed from the rolling 12-month calculation. Looking ahead, readings for January through April 2024 are higher comparisons, meaning progress lower toward the Fed's 2% target may be easier next year when those figures are replaced.

Existing Home Sales Rise for Second Straight Month

Existing Home Sales, which reflect closings on existing homes, beat estimates in November with a 4.8% increase from October. Sales were also 6.1% higher than a year ago, which the National Association of REALTORS ^® (NAR) noted was the largest annual increase since June 2021.

What's the bottom line?

The rise in closings last month makes sense, as the data likely reflects people shopping for homes in September and October, capturing buyers taking advantage of the decline in rates at that time.

This uptick in buyer demand also comes when inventory is still well below pre-pandemic norms. There were 1.33 million units available for sale at the end of November (-2.9% MoM and +17.7% YoY), though many homes counted in existing inventory are under contract and not truly available for purchase. In fact, there were only 953,000 "active listings" at the end of last month, so inventory is tighter than the reporting implies.

NAR's Chief Economist, Lawrence Yun, confirmed, that "more buyers have entered the market" and "home sales momentum is building." This pent-up demand for homes combined with ongoing tight supply continues to bode well for housing as an investment and continued home price appreciation over time.

Home Builders Feeling Positive About the Future

After rising for three straight months, home builder sentiment held steady at 46 this month, per the National Association of Home Builders (NAHB). While confidence remains in contraction territory below 50 (the breakeven point on the Housing Market Index, which runs from 0 to 100), it is at the highest level since April.

What's the bottom line?

? Among the three index components, buyer traffic (31) remains muted while current sales expectations (48) are just below the 50 breakeven level and future sales expectations (66) continue to move higher in expansion territory.

NAHB Chair, Carl Harris, noted that, "While builders are expressing concerns that high interest rates, elevated construction costs and a lack of buildable lots continue to act as headwinds, they are also anticipating future regulatory relief in the aftermath of the election. This is reflected in the fact that future sales expectations have increased to a nearly three-year high."

New Construction Eased in November

Even though home builder confidence has inched higher this fall, builders pulled back on new construction last month, with Housing Starts falling 1.8% from October. The decline in multifamily starts outweighed the increase in single-family homebuilding.

Building Permits, which reflect future construction, were flat for single-family homes but rebounded for multifamily projects.

What's the bottom line?

Housing Starts measure projects where ground has already been broken, so they are a good measure for upcoming supply. As of November, the annualized pace is 1.29 million. When we subtract roughly 100,000 homes that need to be replaced every year due to aging, we're well below demand as measured by household formations that are trending at 1.9 million as of the end of September.

Again, the limited new supply on the market relative to household growth should continue to support home prices going forward.

Also of Note

The final reading for third quarter GDP showed that the U.S. economy grew by 3.1%, coming in above the second estimate of 2.8% reported in November. By comparison, we saw 3% and 1.6% growth in the second and first quarters of this year. Economic activity in the third quarter was driven by consumer spending, exports, federal government spending and business investment.

Meanwhile, November's Retail Sales came in stronger than forecasts, boosted by car sales and online shopping. Sales in October were also revised higher.

And the latest weekly unemployment claims (Initial -22K to 220K; Continuing -5K to 1.874M, near a three-year high) show the ongoing trend in the labor market continues. Employers are holding on to their workers while also slowing down hiring.

Family Hack of the Week

It's National Pear Month! Enjoy this Apple and Pear Crisp courtesy of The Food Network, which is easy to make and perfect for the season. Serves 8.

Preheat oven to 350 degrees Fahrenheit. Peel, core and cut 2 pounds of pears and 2 pounds of apples into large chunks. Place the fruit in a large bowl and add 1 teaspoon each of grated orange zest and grated lemon zest, 2 tablespoons each squeezed orange juice and lemon juice, 1/2 cup sugar, 1/4 cup all-purpose flour, 1 teaspoon ground cinnamon, and 1/2 teaspoon ground nutmeg. Pour into a 9x12x2-inch oval baking dish.

For the topping, combine 1 1/2 cups all-purpose flour, 3/4 cup granulated sugar, 3/4 cup light brown sugar (lightly packed), 1/2 teaspoon kosher salt, 1 cup old fashioned oatmeal, and 2 sticks cold, unsalted butter (diced) until mixture forms large crumbs.

Sprinkle topping evenly over fruit and bake for 50 minutes to 1 hour, until topping is brown and fruit is bubbling. Serve warm with your favorite vanilla ice cream.

What to Look for This Week

November's New Home Sales (Tuesday) and the latest Jobless Claims (Thursday) highlight an otherwise quiet week. The markets will be closed on Wednesday for Christmas.

SOURCE: MBS Highway Marketing Newsletter (12/16/2024).