Inflation Meets Estimates, Home Sales Stall

The Federal Reserve's preferred inflation gauge aligned with projections in January. Meanwhile, home sales stagnated to begin the year, even as prices maintained an upward trajectory across much of the country. Read on for additional insights.

·      Fed’s Favored Inflation Measure Meets Estimates

·      Sluggish New Home Sales to Start the Year

·      Pending Home Sales Plummet to Record Low

·      “Upward Trend” in National Home Prices

·      Also, of Note

Fed’s Favored Inflation Measure Meets Estimates

The Federal Reserve's preferred inflation metric, Personal Consumption Expenditures (PCE), met projections for January. Headline PCE rose 0.3% from December, with the year-over-year rate falling from 2.6% to 2.5%. Core PCE, which excludes food and energy price fluctuations, also increased 0.3% monthly, while the annual rate fell from an upwardly revised 2.9% to 2.6%, reaching one of the lowest levels in four years.

What’s the bottom line? A key driver in progress toward the Fed’s 2% inflation target is shelter costs, which comprise 18% of Core PCE. While shelter costs in PCE have been elevated when compared to more real-time rental data from places like Apartment List and CoreLogic, they have started to align more favorably in the government's report. As PCE better reflects softer real-time rental trends, this should contribute to a decrease in annual inflation readings.

Sluggish New Home Sales to Start the Year

New home sales fell short of estimates in January, as signed contracts dropped 10.5% from December. This decline was partly attributed to high interest rates and adverse winter weather, particularly in the South. However, the impact was mitigated by an upward revision to December's sales figures. On a year-over-year basis, sales decreased by 1.1%.

What’s the bottom line? The limited inventory of existing homes, coupled with strong buyer demand, has shifted attention to the new construction market. But additional inventory is necessary to meet this buyer interest. As of January's end, there were 495,000 new homes available for sale, yet only 115,000 had been completed, with the rest either under construction or not yet started.

Pending Home Sales Plummet to Record Low

Pending Home Sales fell for the second straight month, declining 4.6% from December to January, as reported by the National Association of REALTORS® (NAR). This metric reflects signed contracts on existing homes, which typically precede closings by one to two months, and serves as a key predictor of housing market performance.

What’s the bottom line? NAR Chief Economist, Lawrence Yun, commented, “It is unclear if the coldest January in 25 years contributed to fewer buyers in the market, and if so, expect greater sales activity in upcoming months.” He further noted that while high home prices and mortgage rates have impacted affordability, even a modest decrease in rates could “ignite buyer interest, given rising incomes, increased jobs and more inventory choices.”

“Upward Trend” in National Home Prices

The Case-Shiller Home Price Index, considered the industry standard for measuring home value appreciation, reported a 0.5% increase in home prices nationwide from November to December after seasonal adjustments.

On a year-over-year basis, home values in December rose 3.9%, building upon November's 3.7% gain. The 10-city composite index posted a more robust 5.1% year-over-year increase, while the 20-city index saw a 4.5% rise, indicating stronger growth trends in major urban markets compared to the national average.

Additionally, the Federal Housing Finance Agency’s (FHFA) House Price Index showed a seasonally adjusted increase of 0.4% from November to December, with prices 4.7% higher than last year. Unlike the Case-Shiller Index, the FHFA’s measurement excludes cash buyers and jumbo loans, focusing solely on conventional mortgage financing.

What’s the bottom line? Brian D. Luke, Head of Commodities at S&P DJI, remarked that the Case-Shiller Index "continues to highlight the upward trend of home prices nationally." For example, buying a home for $600,000 that appreciates by 4% over a year could result in a $24,000 gain, underscoring the substantial wealth-building potential of homeownership.

Also, of Note

The second estimate for fourth quarter 2024 GDP indicates that the U.S. economy grew by 2.3%, matching the initial report. This followed growth of 1.6% in the first quarter, 3% in the second, and 3.1% in the third quarter last year.

The Q4 increase was largely driven by rising government and consumer spending, tempered by declining investment. Note this data may be revised in the final estimate at the end of March.

Turning to unemployment data, Initial Jobless Claims (+22K to 242K) reached their highest level since early December. Continuing Claims (-5K to 1.862M) remain elevated above 1.8 million for the thirty-eighth straight week, suggesting longer unemployment periods for job seekers.