Weekend Talking Points - 'Risk-off'

Concerns about the impact of tariffs, the outlook for company earnings, and more have seen the stock market looking very shaky. The ‘risk-off’ trade has benefited bond prices, helping to send average mortgage rates back into the 6% range.

Existing home sales fell. January 2025 existing home sales fell 5% MoM. But they were still up 2% year-over-year, the 4th-straight month of positive annual growth. As NAR’s Chief Economist, Lawrence Yun wrote, “things are looking up” (albeit from low levels). [NAR]

TP: I use NAR’s Pending Home Sales Index to predict next month’s existing home sales. It’s usually quite accurate. But not this time. I thought we’d get a number below 4 million again. We didn’t. That’s quite encouraging, especially since average mortgage rates have come down nearly half a percentage point in February. I still think we’ll get 5–10% transaction volume growth this year.

Case-Shiller: Price growth accelerated. In December 2024, the seasonally-adjusted Case-Shiller national home price index (SA) rose 0.5% month-over-month. That means that for the full year 2024, the index was up 4.0%. Where are prices rising the fastest? New York City, Chicago, and Boston. How about the slowest? Tampa, but that’s after blistering price growth during the previous four years! [CoreLogic]

TP: 4% might not sound like much. But it’s actually quite impressive when you consider that the Case-Shiller national home price index has now risen 53% (!!!) over the last 5 years. [A lot more on this later.]

FHFA: We see similar trends. In December 2024, the FHFA’s national index rose 0.4% MoM (and +4.7% YoY). The strongest growth came from the Middle Atlantic and New England regions (both up 7–8% YoY).

TP: As a reminder, the FHFA employs a repeat-sales method very similar to Case-Shiller. The key difference is that the FHFA data excludes cash-only sales and purchases financed by jumbo loans. In that respect, the FHFA index is a bit more “mass market”.

What our new Secretary of the Treasury said. In his first economic policy address, Scott Bessent warned that while the US economy and labor market looked superficially strong, the underlying economy was “brittle”. He estimated that 95% of the job growth in the last year had come from the government and government-adjacent sectors like healthcare and education. His focus: getting the yields on 10-year US treasuries down.

TP: Scott Bessent knows the markets. He worked at Soros Asset Management and later set up his own macro hedge fund, so he’s not some ivory tower academic.

New home sales fell, but not to worry. In January, builders sold homes at an annualized pace of 657K units, down 10.5% MoM. But that was after big gains in Nov & Dec. [Reuters]

TP: This is a HIGHLY volatile data series: up big one month, down big the next month. The only way you can gain any insight is by looking at the 3-month and 6-month averages, and the January result was only 4% below both of them. In other words, don’t stress.

Pending sales fell again. The volume of new contracts signed fell 4.6% MoM in January 2025 to an all-time low for the data series (back to 2001). This follows a 4.1% MoM decrease in December 2024.

TP: With mortgage rates still high and home prices continuing to rise in most markets, affordability remains a major issue.

On the Case (Shiller) Again

In 2024, the Case-Shiller national home price index rose 4.0%. While that was a much slower pace of appreciation relative to the previous four years, this result should not be viewed as a disappointment. Here’s why:

• At the beginning of 2024, many prominent forecasters (CoreLogic, Fannie Mae etc.) were looking for -2% to 2% price growth.
• Over the past 5 years (2020–2024), the index has risen an incredible 45% ignoring compounding (simply adding up each year’s % growth) or 53% including compounding. With that kind of growth, there was always going to be a slowdown.
• The CAGR (compound annual growth rate) for the Case-Shiller index going back to 1942 (!!!) is around 5.4%. So the 4% we got in 2024 is pretty normal.
• The 4% appreciation in 2024 happened DESPITE a 20–25% increase in inventory levels over the course of the year.
• 4% appreciation on a $400,000 home is still $16,000 of equity gained. I’d take that.

How Did the Big City Indexes Do?

Case-Shiller also publishes monthly index results for 20 of the largest cities. In general, the 20-city (+4.5% YoY) and 10-city (+5.1% YoY) composite indexes grew FASTER than the national index (+4.0% YoY). While New York City (+7.3% YoY) and Chicago (+6.6%) led the pack, the recovery of prices in Seattle (+5.6%) and Las Vegas (+5.5%) was also notable.

The 5-year price appreciation for many cities has been extraordinary. Miami’s price index is up 80% since end-2019, Tampa +69%, Charlotte +68%, and Phoenix +66%. That works out to compounded annual growth rate of 10.7–12.5%. Even the slowest grower, San Francisco, still saw prices rise an average of 6% per year.

The indexes for 6 of the 20 big cities are still below their mid-2022 peaks. That’s right: 2.5 years later, the city indexes for San Francisco (-5.8% below peak), Phoenix (-1.2%), Denver (-1.0%), Seattle (-0.7%), Dallas (-0.6%) and Portland (-0.3%) are yet to make new highs. That doesn’t mean that those indexes have performed badly over the last 5 years — San Francisco’s index was up 33% and Phoenix’s was up 67%. It just means that those markets have yet to completely erase the price declines seen in the second half of 2022.

Lately, most city indexes have been rising every month. In early 2024, 4–6 of the big city indexes saw month-over-month declines each month. (Not the same cities every month, mind you.) But in the second half of 2024, only 1–2 city indexes have seen month-over-month declines. The only exception has been Tampa, which has seen prices decline MoM in 8 of the last 12 months. Still, the total decline for Tampa was only 1% in 2024, and that was after 70% growth in the previous 4 years.

Realtors Confidence Index for January 2025

The results from this monthly survey of Realtors comes out the same time as the existing home sales. It provides a very good gauge of the level of competition and supply/demand balance at the national level. A few things to think about as you read through this section:

• These figures are not seasonally adjusted, so it’s totally normal to see some of the data series start to increase this time of year (prelude to the spring selling season)
• Mortgage rates rose roughly 80 basis points (0.8%) in the final quarter of 2024, which definitely dampened the excitement
• Competition levels, in general, are a bit lower than the same time last year

Average Number of Offers Received per Sale
Homes that sold in January 2025 received an average of 2.6 offers. That was a big jump from 2.1 in December 2024, but this kind of jump happens every year. In January 2024, the figure was 2.7. Remember that 2.0 offers means that, on average, there was just one additional bidder (outside of the winner).

COVID High (2020–2022): 5.5 in April 2022
COVID Average (2020–2022): 3.8
Post-Pandemic Average (2023-): 2.8
January 2025: 2.6
January 2024: 2.7

% of Homes Sold Above List Price
Only 15% of the homes sold in January 2025 transacted above their initial listing price. That was about the same as in January 2024. In fact, this series usually bottoms in January before rising steeply in February and March. The market is getting back to “normal” — where sales prices on average are 95–100% of the listing price.

COVID High (2020–2022): 61% in April 2022
COVID Average (2020–2022): 43%
Post-Pandemic Average (2023-): 24%
January 2025: 15%
January 2024: 16%

Days on Market (“DOM”)
The typical home sold in January 2025 had been on the market for 41 days. That’s quite a bit higher than the 36 seen in January 2024 (and the 33 from January 2023). DOM typically peaks in either January or February before declining sharply until it bottoms around June. Keep in mind that a higher number indicates a slower pace of sales (homes are lingering on the market longer).

Pre-Pandemic Average (2015–2019): 35
COVID Low (2020–2022): 14 in June 2022
COVID Average (2020–2022): 19
Post-Pandemic Average (2023-): 27
January 2025: 41
January 2024: 36

Mortgage Market

Over the last two weeks, the yield on the 10-year US Treasury bond has fallen from 4.64% to 4.24% (-40 bps), and MBS (Mortgage-backed Securities) prices have rallied, helping average 30-year mortgage rates drop convincingly below 7% for the first time since early December 2024. The natural question is: why?

It’s primarily the ‘risk-off’ trade. The equity market has been looking much shakier lately, with growing concerns about tariffs (Everything Everywhere All at Once), earnings growth (e.g., Walmart’s soft guidance, slow retail sales in January) and valuation levels (e.g., Berkshire Hathaway’s record cash hoard). When investors sell stocks, the proceeds often find their way into the bond market, pushing bond prices up and (mathematically) bond yields down.

Here’s what the Fed Funds Rate futures market is currently pricing in for rate cuts. Note that the current Fed Funds Rate policy range is 4.25–4.50%.

• March 19 FOMC Meeting: 95% probability that the policy rate will remain at 4.25–4.50% (down from 98% last week). In other words, that the Fed will stay on pause.
• May 7 FOMC Meeting: 73% probability that the policy rate will remain at 4.25–4.50% (down from 89% last week). 26% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• June 18 FOMC Meeting: 30% probability that the policy rate will remain at 4.25–4.50% (down from 53% last week). 53% probability that the policy rate will be 25 bps below current (which implies one rate cut on either May 7 or June 18). 16% probability that rates will be 50 bps below current.

They Said It

“It has been five years since the Covid-19 outbreak took hold of the global economy, sparking unprecedented volatility, massive fiscal and monetary stimulus, and a housing market that responded to national migratory changes in how we work and where we live. National home prices have risen by 8.8% annually since 2020, led by markets in Florida, North Carolina, Southern California, and Arizona.” — Brian D. Luke, S&P DJI’s Head of Real & Digital Assets

“More housing supply allows strongly qualified buyers to enter the market. But for many consumers, both increased inventory and lower mortgage rates are necessary for them to purchase a different home or become first-time homeowners.” — Lawrence Yun, NAR’s Chief Economist