Weekend Talking Points - 'Dilemma'

Despite all the economic uncertainty, better weather and more homes for sale is bringing the buyers out! Let’s keep things positive, folks!

The Fed’s dilemma. In a recent speaking engagement, Federal Reserve Chairman Jerome Powell acknowledged the difficulty that the Fed currently faced in trying to balance its two mandates: 1) low inflation, and 2) full employment. At the moment, they’re focused on inflation and putting growth concerns second. [Much more on this later; please check it out.]

We’re not going to show your privates. Zillow (and later, Redfin) said that they will not be syndicating previously private (exclusive) listings on their leading property portals. This a direct attack on Compass (and others) who have been encouraging sellers to consider private listings. While some celebrities definitely don’t want millions of Americans looking at photos of their home, most sellers would want the distribution that Zillow and others provide.

TP: Everyone is talking their own book here, as you’d expect. Compass says it wants to preserve consumer choice; Zillow says it wants everyone to be able to see all the listings, all the time. The truth is that private listings are profitable and you can’t sell leads on listings that aren’t on your website.

FHA changes eligibility requirements. Non-permanent residents will no longer be able to access certain FHA loan programs. According to the NAR, “Per FHA, the changes align with President Trump’s call to prioritize benefits for U.S. citizens and lawful permanent residents.”

TP: Under the previous policy, certain non-permanent residents (such as individuals with specific types of visas or work permits) could qualify.

Retail sales show pre-tariff rush. March “core” retail sales rose a solid 0.4% month-over-month, with auto/auto part sales jumping 5.3% MoM. Every car dealer in America has been buying radio spots: Act now to get these tariff-free deals! [BEA]

TP: Watch retail sales closely over the next few months. Remember, the US economy is driven by me and you buying stuff (~70% of GDP)!

Tariffs and new homes. The National Association of Home Builders’ overall confidence index rose 1 point to 40 in March (anything less than 50 is bearish), but the future outlook dropped from 47 → 43, which is the lowest since November 2023. Builders said that 60% of suppliers had already raised prices in anticipation of higher tariffs, with an average increase of 6.3%, and adding around $10K to the cost of a new home. [NAHB]

Housing starts fall. Was it the tariffs? In March, nationwide housing starts dropped 11% MoM to 1.3 million units (seasonally-adjusted, annualized rate). The media blamed it on tariffs: if you don’t know what your bill of materials is going to be, how do you plan & price a new home? [Census Bureau]

TP: While there is certainly some truth to this, and the NAHB referenced the same, I actually think this drop was just normal month to month volatility. In February, housing starts rose 10% MoM. We’ll know for sure when we get the April numbers…if housing starts fall to between 1.1–1.2 million annualized, we’ll know it was the tariffs.

Student loan delinquencies hit FICO scores. Our nationwide average FICO score dropped from 717 → 715 (that’s still “good” by the way). The main driver was the (much-delayed) recognition of student loan delinquencies. In a white paper, the Federal Reserve had previously warned that 9 million student loan borrowers could see “substantial declines in credit scores over the first quarter of 2025.” [FICO]

TP: While that magnitude of decline may not seem like much, it’s only the second time in a decade that FICO scores have dropped.

The Fed’s Dilemma

What should the Fed do? Should it move quickly to head-off potential inflation with rate hikes, or anticipate a slowing economy with rate cuts? The Fed’s dual mandate always involves a delicate balancing act, but the high levels of economic uncertainty today make the FMOC’s job particularly challenging. The Fed’s dilemma is important to understand, so let me elaborate:

Should the Fed raise rates (or at least keep them steady)? On their own, the Trump tariffs will, without a doubt, be inflationary. And a resurgence in inflation would normally cause the Fed to raise rates.

‍Or should the Fed cut rates? To the extent that tariffs slow global trade and hit consumption (70% of GDP!), the US economy will slow and might contract. And remember, it is the economic contraction itself that leads to a rise in unemployment, not the other way around. Knowing this, the Fed almost always responds to economic contraction with aggressive interest rate cuts.

But…because the unemployment rate still looks low right now, the “data dependent” Fed is in no rush to provide looser financial conditions, despite a growing body of evidence (announced layoffs, reduced plans to hire etc.) that a labor market slowdown is here.

Right now, the Fed is more focused on inflation than labor. Jerome Powell has said this explicitly. He can clearly see the potential inflationary impact of tariffs. He can’t clearly see the economic slowdown until it shows up in the data.

Nothing cures inflation like a good recession. When an economic contraction takes hold, the problem quickly becomes deflation not inflation! Why? Because what everyone forgets is demand destruction. When people are more concerned about losing their jobs, and the price of everything has risen, they stop buying stuff and try to save money.

Mortgage Market
Another week, another big shift in sentiment. This time, the market focused on inflation again, “pricing out” any hope of a rate cut in May and putting more or less even odds on a cut in June. The market was clearly taking its cues from the recent public comments of Jerome Powell and other Fed members: control inflation first, worry about growth/labor second.

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: 90% probability that the policy rate will remain at 4.25–4.50% (down big from 78% last week)! 10% 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 big from 17% last week). 60% probability that the policy rate will be 25 bps below current (which implies one rate cut on either May 7 or June 18). 6% probability that rates will be 50 bps below current.

They Said It

“Policy uncertainty is having a negative impact on home builders, making it difficult for them to accurately price homes and make critical business decisions. The April HMI data indicates that the tariff cost effect is already taking hold, with the majority of builders reporting cost increases on building materials due to tariffs.” — Robert Dietz, NAHB’s Chief Economist

‍