Weekend Talking Points - 'Pause'

Mortgage rates have been trending lower lately, but not because of the typical drivers (lower inflation or higher unemployment). Instead, we have China and Colombia to thank. Read on!

China’s DeepSeek shakes markets. Was that the sound of the AI bubble starting to deflate? The open source release of China’s (apparently) more efficient and much cheaper-to-build AI model drove a massive tech stock sell-off (NVIDIA closed down -17% on 1/27/2025). In a classic “risk-off” trade, money flowed out of stocks into bonds, sending 10-year US treasury yields down 11 basis points (11 bps = 11/100 = 0.11%).

TP: Stocks and bonds compete for your investment dollars. Over the long term, stocks offer higher returns (but carry higher risks of a negative outcome). Bonds, on the other hand, offer lower returns (but have lower risks of a negative outcome).

That’s why money managers typically recommend that retirees have 60–70% of their portfolio in bonds: to protect the retiree’s principal from the risk of a big sell-off. “Risk-on” assets are stocks, crypto etc. “Risk-off” assets are bonds, gold etc.

Early spring for existing home sales? Maybe not. Existing home sales rose 2.2% month-over-month in December (+9.3% year-over-year) to 4.24 million units SAAR as buyers shrugged off higher rates and chilly temps. That’s the fastest pace of sales we’ve seen since February 2024 (Yay!)…BUT the latest pending sales data [discussed below] suggests that the next existing home sales figure will be lower, potentially back below 4 million (Boo!). [NAR]

New home sales rose too. In December 2024, new home sales rose 3.6% month-over-month (+6.7% year-over-year) to 698,000 units SAAR. Good news overall, but the figure isn’t terribly different from what we’ve seen over the last year (650k-740k). The median new home sales price, meanwhile, climbed 6.1% MoM to $427,000. That’s just 6% above the median sales price for existing homes ($404,400). [Census Bureau]

TP: SAAR stands for the seasonally-adjusted, annualized rate. We didn’t actually sell 698,000 new homes in December. No, we sold just 52,000 new homes, which adjusted for normal seasonality and then multiplied by 12, we get to 698,000 annualized. In other words, the pace at which we sold homes in December was consistent with selling 698,000 homes over the next 12 months.

Rental rates trending modestly downwards. National rents fell 0.2% January, and the vacancy index hit a new peak at 6.9%, as new supply outstripped demand. The largest rental rate declines were seen in Austin (-6.3% YoY) and Denver (-4.5% YoY). [Apartment List]

Case-Shiller index hits another record. Overall, home price appreciation continued in November, with the seasonally-adjusted national index rising 0.44% month-over-month. That meant that year-over-year growth actually accelerated from 3.7% to 3.8%. The strongest price growth continued to come from Northeastern (New York, D.C.) and Midwestern (Chicago, Cleveland) metros. Only two cities saw month-over-month price declines (Seattle, Tampa), and only one (Tampa) is seeing (very slight) year-over-year price declines. [S&P DJI]

TP: Compared to the wild price growth we saw in 2020 (+11%) and 2021 (+19%), 3.8% doesn’t look like much. That’s certainly true, but: 1) it’s still positive despite very low transaction volumes, and 2) I’ll take 3.8% capital appreciation on a $400K home (+$15K) every time.

FHFA: Home prices +0.3% MoM in November. Fairly similar results from the FHFA’s housing index, with their year-over-year growth seen at +4.2%, and the strongest price appreciation coming from the New England (+7.8% YoY), Middle Atlantic (+6.4% YoY), and East North Central (+5.7% YoY, that’s IL/IN/OH/MI/WI) regions. [FHFA]

TP: The FHFA index is constructed using a methodology that is very similar to Case-Shiller. The difference is that the FHFA index only looks at transactions that: 1) involve a conforming mortgage (so all-cash deals are excluded), and 2) don’t involve jumbo loans. In this regard, the FHFA index is a bit more ‘mass’ market.

Fed presses ‘pause’ on rate cuts. On January 29, the members of the Federal Open Markets Committee voted unanimously to keep the target Federal Funds Rate steady at 4.25%-4.50%. The basic message (from the official release and press conference) was that the labor market still looks solid and inflation remains a concern. The next Fed meeting is set for March 19. [Federal Reserve]

TP: As a reminder, the Fed initiated this loosening cycle with a 50 bps cut on September 18, followed by two, 25 bps cuts on November 7 and Dec 18. As the chart above shows, inflation (as measured by “core” PCE) has been flat to slightly up for most of the last 6 months. We’ll get the new PCE figure for December today (Friday). “Core” PCE is expected to be flat at +2.8% YoY.

The nice run for pending sales comes to an end. In December 2024, the NAR’s Pending Home Sales Index (signed contracts) fell 5.5% month-over-month to 74.2 — an index level that is consistent with an existing home sales figure below 4.0 million. Prior to this, pending sales had risen for four straight months. [NAR]

TP: The Pending Home Sales Index is designed to be a leading indicator of existing home sales. PHSI measures signed contracts, whereas existing home sales measures the actual sales. But PHSI is not a perfect predictor of Existing Home Sales in the following month because: 1) it can take 1–2 months for a signed deal to close, and 2) some contracts don’t close at all.

That being said, I’ve generally found PSHI to be a very useful predictor of next month’s Existing Home Sales. Here’s my easy little rule-of-thumb:

Pending Home Sales Index (this month) X 53,000 = Existing Home Sales (next month). Or, in this case: 74.2 (Dec PHSI) X 53,000 = 3,932,600 (Jan Prediction for Existing Home Sales).

A Look Back at 2024

With the December existing home sales figures released, we now know that 4,062,000 million homes changed hands in 2024. There’s no nice way to put it: this was a crappy year. After falling 18% in 2022 and another 19% in 2023, transaction volumes only just managed to stay flat in 2024. You’ve got to go all the way back to 1995 to see a pace of sales this low. Yuck.

The silver lining to all this is that transaction volumes can’t remain this low. Our population has grown massively since 1995. Inventory levels have risen in both 2023 and 2024. We just need to catch a break: mortgage rates back into the 6% range and/or home price drops in a few key markets.

Mortgage Market

Since peaking around 7.25% in mid-January, the average 30-year mortgage rate has been trending lower. That’s not because the latest inflation or employment data has been bullish for the bond market (it hasn’t been), but because of other factors: 1) the ‘risk-off’ trade spurred by DeepSeek’s AI performance sent money rushing out of stocks into bonds, and 2) the rising belief that Trump’s tariff threats are more negotiating tactics (looking at you, Colombia) than firm targets.

Let’s just hope that today’s PCE report doesn’t deliver any nasty surprises. The last thing we need is a third-straight year of mortgage rates rising just before spring selling season kicks off.

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: 82% probability that the policy rate will remain at 4.25–4.50%. In other words, that the Fed will stay on pause. 18% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• May 7 FOMC Meeting: 57% probability that the policy rate will remain at 4.25–4.50%. 38% probability of a 25 bps rate cut.
• Basically, you’ve got to go all the way out to the June 18 meeting before the probability of rates being lower than they are today is >50%.

They Said It

“Home sales in the final months of the year showed solid recovery despite elevated mortgage rates. Home sales during the winter are typically softer than the spring and summer, but momentum is rising with sales climbing year-over-year for three straight months. Consumers clearly understand the long-term benefits of homeownership. Job and wage gains, along with increased inventory, are positively impacting the market.” — Lawrence Yun, NAR’s Chief Economist

“[In general], national home prices are trending below historical averages. [But] markets in New York, Washington, D.C., and Chicago are well above norms, with New York leading the way. Unsurprisingly, the Northeast was the fastest growing region, averaging a 6.1% annual gain. However, markets out west and in once red-hot Florida are trending well below average growth. Tampa’s decline is the first annual drop for any market in over a year…Despite below-trend growth, our National Index hit its 18th consecutive all-time high on a seasonally adjusted basis.” — Brian D. Luke, S&P DJI’s Head of Real Estate & Digital Assets

“Year-over-year [rental rate] growth has now been negative since June 2023, but in recent months, there are signs that we could see a return to positive growth this year…With the supply wave now getting past its peak, it appears that the era of declining rents could be nearing its end.” — Apartment List Rent Report