Weekend Talking Points - 'Nuevo'

We’ve got a lot of news to catch up on after our Christmas break, so we’ve broken it up by themes rather than chronological order.

HOME PRICES

On a raw (unadjusted) basis, home prices almost always drop in the winter. But on a seasonally-adjusted basis, home prices are still rising, albeit at a slower pace. Let’s call it 3–4% year-over-year.

Case-Shiller keeps growing, but slowing: The Case-Shiller national home price index rose 0.3% month-over-month in October 2024, about the same pace as in September 2024. Year-over-year growth, however, slowed from +3.9% in September 2024 to +3.6% in October 2024. The fastest home price growth was seen in Boston and Washington D.C. (both +0.7% MoM), the slowest in Cleveland (-0.3% MoM) and Tampa (0.1% MoM). [S&P DJI]

CoreLogic sees even slower price growth. According to CoreLogic’s HPI index, national home prices have basically flatlined since the summer, with year-over-year growth slowing to +3.4% in November 2024. They now forecast +3.8% price growth over the next 12 months. [CoreLogic]

TRANSACTION ACTIVITY

There was definitely a bit of pick-up in activity in the last quarter of the year, as falling rates (May-September) and rising inventory improved both choice and affordability. Sadly, that may have come to an end with the recent sharp rise in mortgage rates.

Existing home sales +4.8% in November. That’s the 2nd month of gains, reflecting lower mortgage rates in Aug/Sep. Home prices declined slightly MoM, but were still up nearly 5% YoY. [NAR]

Pending home sales rose again. Signed contracts for existing homes rose 2.2% month-over-month in November, the 4th-straight month of rising transaction volume. [NAR]

THE FED & INFLATION

With limited progress on inflation lately, and the job market still looking solid, the Fed’s currently in no rush to deliver more ‘accommodative’ rates.

Fed cuts rates, but signals slower pace. On December 18, the Federal Reserve’s Open Markets Committee (“FOMC” or “the Fed”) voted to cut the Federal Funds Rate by another 25 basis points (25 bps = ¼ of a percentage point). That brought the total amount of cuts in this loosening cycle to 100 bps (50 + 25 + 25) so far. [Federal Reserve]

At the same time, Fed members’ updated “dot plot” forecasts for where they think the Fed Funds Rate will be over the next year appeared to slash the number of potential rate cuts in 2025 from 4 (100 bps total) to 2 (50 bps total). Naturally, the bond market hated this. [Federal Reserve]

PCE (inflation) came in lower than expected. After a somewhat disappointing CPI release, at least the PCE report (the Fed’s preferred inflation measure) delivered better news, with both “headline” and “core” PCE rising just 0.1% month-over-month in November. [BLS]

TP: Annualized PCE (both headline and core) has risen in each of the last two months, but that’s mainly a base effect phenomenon. The monthly headline PCE is up just 0.5% over the last three months (+0.17%, +0.23%, +0.13% = 0.53%) which annualizes at 2.11%.

INVENTORY

What’s the inventory situation? It all depends on your time frame and your location. At the national level, we’re approaching pre-pandemic numbers of homes for sale. But a lot of that is coming from a few big markets (Florida, Texas). The inventory situation in many Midwestern and Northeastern metros is still very tight.

Inventory dropped in December. The active inventory of homes for sale fell 9% month-over-month to 871,509 units in December 2024. While this looks like a big drop, it’s actually pretty normal for this time of year. ’Tis the season for delistings. That said, active inventory is still up 22% compared to December 2023, and +28% compared to December 2024. [Realtor.com]

JOBS

Between strikes, storms, and seasonality, it’s been impossible to get a clear reading on the labor market. This month’s “jobs week” has been typically confusing, with mixed signals everywhere. The market will likely take direction from the BLS unemployment rate coming out today.

JOLTs: Job openings up in November. Total US job openings rose to 8.1 million in Nov 2024, well ahead of expectations of 7.7 million. Actual hiring activity, however, was modest. Both the hires rate (3.3%) and the quits rate (1.9%) were low, suggesting a cooling labor market. [BLS]

ADP: December jobs additions slow. US private employers added just 122,000 jobs in December, below expectations of roughly 140,000, and down from +146,000 in November. The annual wage increase for job stayers dropped to +4.6% (the lowest since July 21), while the increase experienced by job switchers fell to +7.1%. [ADP]

BLS: Quick preview. The critical Bureau of Labor Statistics monthly employment report will be out on Friday (today), with the Street looking for 154,000 job additions in December (vs. +227,000 in November), and for the unemployment rate to be steady at 4.2%.

RENTAL RATES

Many people tend to think of rental rates and home prices as two separate things. They aren’t. Available rental units ‘compete’ with units for sale in terms of affordability and availability. Trends in residential rental rates directly affect multifamily real estate values. Moreover, rental rates have a massive influence on the inflation statistics that drive the Fed’s interest rate decisions. If you’re not paying attention to rental rates in your city, you really should be.

Apartment List: Rents down again. According to Apartment List, national rents fell 0.6% month-over-month in December 2024 (normal for this time of year), and are now 4.8% below their mid-2022 peak. Rents have been falling (slowly, but steadily) since mid-2022. Just compare the peaks and troughs in the graph below. With very strong new supply growth, the national vacancy rate has climbed to 6.8%, the highest since the onset of COVID.

“Many of the steepest year-over-year declines [in rental rates] remain concentrated in Sun Belt metros that are rapidly expanding their multifamily inventory, such as Austin (-7.4% YoY), Raleigh (-4.1% YoY), and Jacksonville (-3.0% YoY).” — Apartment List Rent Report

Realtor.com: National rents 3.2% below 2022 peak. November marked the 16th-straight month that rents were lower year-over-year. Despite that, rental affordability is still very stretched. On their numbers, the biggest drops were seen in Denver (-6.7% YoY), Memphis (-6.2% YoY), Nashville (-5.6% YoY) and Austin (-4.7% YoY) [Realtor.com]

Fed Governor Waller’s Speech to the OECD on January 8

Christopher Waller could be the next Fed Chairman. This speech was really interesting, because he was both: 1) unusually forthright, and 2) what he talked about were the issues we’ve been highlighting for literally years. The bracketed comments and bolding are my own:

“To tease out the underlying trend in inflation, I often look at the six-month percent change in core PCE prices, which is 2.4 percent at an annual rate for November and has mostly been moving down toward 2 percent over the course of the year.

Second, the monthly [PCE] reading for November came in much lower than expected at 0.11 percent after rising 0.26 percent in October.

Third, inflation in 2024 has largely been driven by increases in imputed prices, such as housing services [shelter] and nonmarket services, which are estimated rather than directly observed and I consider a less reliable guide to the balance of supply and demand across all goods and services in the economy.

These two categories represent about one-third of the core PCE basket. If you look at the prices associated with the other two-thirds of core PCE, they on average increased less than 2 percent over the past 12 months through November. I don’t support ignoring our best measures of prices for housing and non-market services, but I find it notable that imputed prices, rather than observed prices, were driving inflation in 2024 and thus expectations of the policy rate path.”

[In other words, if the Fed is ‘data dependent’ on flawed or lagged measures, the policy decisions could also be flawed or mistimed.]

Later, he added:

“As always, the extent of further easing will depend on what the data tell us about progress toward 2 percent inflation, but my bottom-line message is that I believe more cuts will be appropriate.”

Mortgage Market

For prospective buyers and real estate professionals, watching average 30-yr mortgage rates approach 7.2% again has been incredibly painful — especially with the spring selling season around the corner. Will this be the third sedate spring in a row?

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 (AFTER the 25 bps cut announced on December 18) is 4.25–4.50%.

• Jan 29 FOMC Meeting: 93% probability that the Fed will stay on hold. 7% probability of a further 25 bps cut.
• March 19 FOMC Meeting: 58% probability that the policy rate will remain at 4.25–4.50%. In other words, no rate cuts in either January or March. 40% probability that rates will be at 4.00–4.25%, with one 25 bps cut — mostly likely in March.

They Said It

“The labor market downshifted to a more modest pace of growth in the final month of 2024, with a slowdown in both hiring and pay gains. Health care stood out in the second half of the year, creating more jobs than any other sector.” — Nela Richardson, ADP’s Chief Economist

“Consumers appeared to have recalibrated expectations regarding mortgage rates and are taking advantage of more available inventory. Mortgage rates have averaged above 6% for the past 24 months. Buyers are no longer waiting for or expecting mortgage rates to fall substantially. Furthermore, buyers are in a better position to negotiate as the market shifts away from a seller’s market.” — Lawrence Yun, NAR’s Chief Economist, discussing Pending Sales.

“Our [Case-Shiller] National Index hit its 17th consecutive all-time high, and only two markets — Tampa and Cleveland — fell during the past month. The annual results continue to post positive inflation-adjusted returns but are falling well short of the annualized gains experienced this decade. Markets in Florida and Arizona are rising, but not keeping up with inflation, and are well off the over 10% gains annually from 2020 to present. This has allowed other markets to catch up.” — Brian D. Luke, S&P DJI’s Head of Real & Digital Assets