Weekend Talking Points - 'Pausitive'

Economic uncertainty (higher tariffs, slower GDP growth, weaker stock market) is definitely rising. The good news is that despite the Fed keeping short-term interest rates on hold on March 19, mortgage rates are moving lower again.

Consumer sentiment plunges. The Conference Board’s closely-watched index of consumer confidence dropped 7 points to 98.3 in February 2025. That was well below Wall Street expectations and the biggest monthly drop seen since August 2021. What has spooked consumers? Tariff concerns, egg prices, slowing economic growth, etc.

Builder confidence takes a tariff hit. The National Association of Homebuilders’ confidence index for March 2025 dropped 3 points to 39, its lowest level since August 2024. You may recall that in February 2025, the NAHB index plunged 5 points (47 → 42) due to tariff fears (the Canada & Mexico tariffs ended up being delayed). This further fall was due to tariff realities.

TP: NAHB’s Chief Economist, Robert Dietz, estimates that the new tariffs will add roughly $10,000 to the cost of a new home. For perspective, the cost of the median-priced new home in January 2024 was $446,000. So these new tariffs would add about 2%. The issue, as builders know very well, is that affordability is already very stretched.

Bill Pulte Confirmed as new FHFA Director. Recognize the name? That’s right, Bill Pulte is the grandson of the founder of the Pulte Group, the nation’s 3rd-largest new home builder. As a reminder, the FHFA was established in 2008 to regulate and oversee Freddie Mac and Fannie Mae after those two huge GSEs (government-sponsored enterprises) suffered huge losses on sub-prime mortgages during the housing crisis.

Housing starts rebounded after weak January. Last month, housing starts dropped 11% month-over-month. In February 2025, they rebounded 11% MoM. So we’re roughly back where we were in December 2024, with around 1.5 million units started (on an annualized basis), 73% of which are single-family homes.

Fed extends the ‘pause’. Members of the Federal Open Markets Committee (“FMOC”) voted unanimously to keep the policy range for the Fed Funds Rate set at 4.25–4.50%. The last time the Fed cut interest rates was on December 18, 2024. FMOC members also provided their updated forecasts for key economic variables:

Median FMOC Member Expectations

• 2025E GDP: From +2.1% YoY → +1.7% YoY (so seeing slower economic growth)
• 2025E “Core” PCE: From 2.5% YoY → 2.8% YoY (so seeing higher inflation)
• 2025E Unemployment Rate: From 4.3% → 4.4% (seeing slightly looser job market)
• Number of Rate Cuts in 2025: 2 (unchanged median overall, but more people seeing zero rate cuts and fewer seeing >2 rate cuts)

TP: To be honest, the FMOC members aren’t great forecasters. Their expectations tend to reflect the trends in the latest data, and there is a tremendous amount of “group think.” The higher inflation forecasts reflect the presumed impact of Trump’s tariffs, and the lower GDP forecast was definitely influenced by the Atlanta Fed’s GDPNow model calling for a contraction in 1Q 2025 GDP. These forecasts can (and will) change dramatically if the data changes.

Existing home sales surprise. This one really shocked me. After two months of declining pending home sales (-3% MoM in December 2024 and -5% MoM in January 2025), I fully expected existing home sales would contract in February 2025. Instead, they rose 4.2% MoM to 4.26 million units (SAAR). The median sales price, meanwhile, climbed 1.3% MoM (3.8% YoY) to $398,400, driven by much stronger sales in the West region, where median home prices are nearly 2x that of the South and Midwest regions.

TP: I have a feeling like the January existing home sales figure may have been more affected by bad weather than even the NAR realized. Otherwise, you just can’t reconcile the pending and existing home sales figures.

Mortgage Market

On March 19, the Fed didn’t cut rates. They didn’t raise rates. In fact, they didn’t really say much that was different except that they were going to slow the pace of ‘quantitative tightening.’ But the bond market loved it, and you might be wondering why:

• You’ve heard a lot about quantitative easing (“QE”). QE is the Fed BUYING securities (treasury bonds, mortgage backed securities) in the open market. They did this to boost the economy by putting downward pressure on yields (when you buy a lot of bonds, the bond price rises and the bond yield falls).
• Quantitative tightening (“QT”) is the reverse of QE. With QT, the Fed is SELLING securities that it already owns, potentially pushing bond prices lower and bond yields higher. QT exerts upward pressure on yields, even if other factors (falling inflation) suggest that rates should be falling.
• So, when the Fed SLOWS the pace of QT, there will (in theory) be less upward pressure on rates. The headwinds dissipate. That’s why the bond market liked the Fed announcement.

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%.

• May 7 FOMC Meeting: 81% probability that the policy rate will remain at 4.25–4.50% (way up from 74% last week). 19% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• June 18 FOMC Meeting: 34% probability that the policy rate will remain at 4.25–4.50% (up from 24% last week). 55% probability that the policy rate will be 25 bps below current (which implies one rate cut on either May 7 or June 18). 11% probability that rates will be 50 bps below current.

They Said It

“Construction firms are facing added cost pressures from tariffs. Data from the HMI March survey revealed that builders estimate a typical cost effect from recent tariff actions at $9,200 per home. Uncertainty on policy is also having a negative impact on home buyers and development decisions.” — Robert Dietz, NAHB’s Chief Economist

“Economic activity continued to expand at a solid pace in the fourth quarter of last year, with GDP rising at 2.3 percent. Recent indications, however, point to a moderation in consumer spending following the rapid growth seen over the second half of 2024. Surveys of households and businesses point to heightened uncertainty about the economic outlook. It remains to be seen how these developments might affect future spending and investment.” — Jerome Powell, Federal Reserve Chairman