Weekend Talking Points - 'Subdued'

The subdued spring continues, with the inventory of new and existing homes for sale rising, and weaker home price growth than normal for this time of year. The Fed kept interest rates on hold: still worried about the impact of tariffs on inflation, and still comforted by the low unemployment rate.

Fed kept short-term interest rates stable. For the fourth FOMC (Federal Open Markets Committee) meeting in a row, Fed members voted to keep the Federal Funds Rate target range steady at 4.25%-4.50%. While recent inflation (CPI & PCE) trends have been encouraging, Fed Chair Jerome Powell is very concerned that the “Liberation Day” (April 2) tariffs will lead to a resurgence in prices.

TP: The last time the Fed cut interest rates was December 18, 2024.

Housing starts fell to a 5-year low. A massive 30% month-over-month drop in multifamily unit construction drove total housing starts down 10% MoM to 1.26 million units annualized. [NAHB]

May retail sales saw a big, tariff-driven drop. The 0.9% month-over-month decline was led by big-ticket items (like cars) that had seen big sales increases (due to tariff front-running) in March & April.

Existing home sales flatlined (at low levels). May existing home sales were flat month-over-month at 4.03 million units SAAR (seasonally-adjusted, annualized rate), while median sales prices rose just 1.3% year-over-year. Total housing inventory (this includes homes already under contract, but not yet closed) climbed above 1.5 million units for the first time in five years. [NAR]

TP: A normal pace for existing home sales should be around 5.5 million units (SAAR). Instead, we seem to be stuck at a 4.0 million unit pace. This, despite inventory levels approaching pre-pandemic levels. I also note that the median listing price in the South has declined YoY for the second-straight month (-0.7%) and median listing prices in the West are barely positive YoY.

Realtor’s Confidence Index for May 2025. The seasonal upswing in competition levels continued, but things remain cooler than the same time last year. For example, there was an average of 2.5 offers for every home sold in May 2025 (up from 2.4 in April 2025, but down from 2.8 in May 2024). Similarly, 60% of homes sold in May 2025 were on the market less than a month (same as in April 2025, but down from 67% in May 2024).

Case-Shiller: Home price growth continues to decelerate. In April 2025, Case-Shiller’s seasonally-adjusted (“SA”) national home price index declined by 0.4% month-over-month. As a result, annual price growth decelerated to +2.7% YoY in April 2025 (from +3.3% YoY in March 2025). This was actually the second consecutive month that the SA index declined MoM. In fact, 15 of the 20 big city SA indexes saw MoM declines. And Dallas (-0.3% YoY) joined Tampa (-2.2% YoY) in seeing year-over-year price declines. [Much more on this later]

FHFA: Yup, we’re seeing similar trends. In April 2025, FHFA’s SA national home price index also declined by 0.4%. As a result, annual price growth decelerated to +3.0% YoY in April 2025 (from +3.9% YoY in March 2025). 5 out of the 9 census regions saw month-over-month declines in their SA indexes, with the biggest drop seen in the South Atlantic region (which includes Florida). The strongest price growth was in the Middle Atlantic region (which includes New York and New Jersey).

TP: It’s a bit complicated, but worth understanding. For both Case-Shiller and FHFA, the “raw” (unadjusted) home price indexes actually grew month-over-month in April, but by less than is normal for this time of year. As a result, the seasonally-adjusted numbers showed MoM decreases. On a raw basis, only two Case-Shiller big city indexes saw MoM declines (Phoenix and Los Angeles) — and they were very modest indeed.

New home sales were also subdued. New home sales in April fell 14% to a seasonally-adjusted, annualized rate of 623,000 units. But this is a volatile number, so I tend to look at 3 and 6-month moving averages, and these remained stable at around 680,000 units. The really interesting thing was the continued rise in the number of homes for sale (the equivalent of inventory for the new home market). New homes for sale climbed to 507,000 units, which works out to nearly 10 months of inventory based on the current rate of sales.

TP: Affordability issues (home price + mortgage rate) affect both the existing and new home market. Homebuilders can offer smaller floorplans and interest rate buy-downs, but that can only go so far if potential buyers are spooked by high monthly mortgage payments and broader economic concerns.

RCI for May 2025 — The State of Competition

Every month, the NAR surveys Realtors and asks them for a combination of hard and soft data. The results of this Realtors Confidence Index (“RCI”) are released on the same day as the existing home sales figure. In all of the charts below, it’s useful to compare the seasonal peaks and troughs. If the peaks are getting lower each year, that’s a sign of declining competitive ferocity.

Seasonal upswing in competitive bids, but cooler than last year. In May 2025, there was an average of 2.5 offers for every property sold, up from 2.4 in April 2025. But in May 2024, the figure was 2.8, and in May 2023, it was 3.2. Keep in mind that this is a national figure: in the hotter Northeast and Midwest regions, this figure is likely >3; while in the South, it’s likely between 1–2.

The % of properties selling above list price is also turning up. In May 2025, 28% of homes sold above their list price, up from 18% in April 2024, but down slightly from 30% in May 2024. In May 2023, that figure was 31%.

Days on Market. The homes that sold in May 2025 spent a median of 27 days on the market. That’s down from 29 days in April 2025, but is higher than the 24 days in May 2024. Remember: a lower DOM implies a faster pace of sales; a higher DOM means that homes are lingering on the market longer. In May 2023, DOM was just 18. In May 2022, it was 16.

First-timers are still finding a way. Historically (2008–2018), first-time buyers typically represented ~32% of the homes purchased in a given month. During the pandemic, this got as low as 26% as home prices (and later mortgage rates) moved sharply higher. Frankly, I find it amazing that first-timers are still finding a way! It just goes to show how powerful the desire for home ownership is. In May 2025, 30% of homes sold were bought by first-timers. This was down from 34% in April 2025, and slightly lower than 31% in May 2024.

And the flip-side of first-timers is all-cash deals. When mortgage rates are high, cashed-up buyers (typically older folks and property investment companies) have a huge advantage. First-timers, however, are rarely in the position to buy a home without a mortgage. In May 2025, 27% of all homes sold were bought all-cash. This was up from 25% in April 2025, but slightly down from 28% in May 2024.

Here’s something else that I found interesting. Each month, the survey asks Realtors what their outlook is for increased buyer activity and increased seller activity over the next 3 months. This is the first time in many years that the outlook for increased seller activity was much higher than the outlook for increased buyer activity. (The orange line is well above the blue line). Buyers are still facing affordability issues, but sellers seem to be getting over the ‘lock-in’ effects, with total inventory rising above 1.5 million units.

On the Case (Shiller) Again — April 2025

Overall, the April 2025 Case-Shiller numbers illustrated a very subdued spring selling season, with home price growth still positive month-over-month (on a raw basis), but much weaker than normal for this time of year (resulting in negative SA figures).

The raw (unadjusted) national index rose 0.6% MoM in April. But the SA national index fell 0.4% MoM in April (vs. down 0.3% MoM in March). As a result, year-over-year growth in the SA index declined to +2.7% in April (from +3.3% in March). Price growth is definitely decelerating.

As we do each month, we looked at the 20 big city indexes in detail. Here’s what we found:

• 15 of the 20 big city indexes saw their SA indexes decline MoM, with the largest drops seen in San Francisco (-1.2%), Los Angeles (-1.0%), Phoenix (-0.9%) and Seattle (-0.9%).
• The biggest MoM increases came from New York City (0.6%), while the highest YoY growth came from New York City (+7.9%) and Chicago (+6.0%). As we are seeing from other data sources, the Northeast and the Midwest regions are where inventory levels are still low and price growth is still strong.
• Two cities are now seeing YoY price declines in their SA indexes: Tampa (-2.2% YoY) was joined this month by Dallas (-0.3% YoY). Keep in mind, however, that Tampa prices rose 69% between end-2019 and end-2024, and Dallas prices were up 54% over the same time period.
• There are 6 cities that still haven’t yet fully recovered from their 2H 2022 price falls: San Francisco (-7.7% from peak), Denver (-2.8%), Phoenix (-2.4%), Dallas (-2.2%), Seattle (-2.3%) and Portland (-2.2%).

Reminder: The Case-Shiller index is the gold standard for measuring home price growth because it uses the repeat sales method (looking at ‘pairs’ of transactions for the same home) to more accurately gauge true appreciation. However, this accuracy comes at a cost: a nearly two-month time lag.

Should we be Concerned about These Price Drops?

No. What we are seeing today is orderly and generally linked to: 1) home price performance over the last 5 years, and 2) current inventory levels. As someone who analyzed the stock market for 20 years, I would categorize this as a very modest correction. Corrections can be very healthy for markets in the longer-term: they reestablish balance between supply and demand.

Prices aren’t falling everywhere. In fact, they aren’t falling in most cities. And the markets where they are falling generally exhibit three attributes: 1) inventory levels already well above pre-pandemic levels, 2) significant new home construction, and 3) major home price growth between 2019–2024. This all makes sense.

And, of course, 30-yr mortgage rates hovering around 7% aren’t helping with affordability. But as we’ve seen, the “lock-in” effect is fading (at some point you just have to move), there is more inventory for buyers to choose from, and if mortgage rates dropped below 6.5% (only 30–40 bps below current), recent history shows that we’d see demand pick up significantly.

Mortgage Market

Fed Chairman Jerome Powell has been catching a LOT of flak lately from the President (and even new FHFA Director Bill Pulte) for not cutting rates. But if you put yourself in Powell’s shoes, you can understand his reluctance to loosen monetary policy before the true impact of the “Liberation Day” tariffs shows up in the numbers. Remember: the unemployment rate remains low by historical standards.

That said, here are my issues with the Fed’s extended ‘pause’:

1. The Fed lifted rates 500 bps as “headline” CPI rose from 2% (Jan 2021) to 9% (June 2022). Well, the latest “headline” CPI figure is 2.4% (May 2025), but the Fed has only cut rates 100 bps! In my mind, there is absolutely room to cut rates by another 50–100 bps.
2. So much of the reported inflation is coming from “shelter” costs (rent + owner’s equivalent rent) which, due to the BLS’ collection method, is capturing rental market conditions from 1–1.5 years ago!
3. The consistently negative revisions to the initial BLS jobs report, and the very different picture we’re getting from data sources like ADP & Challenger, suggest that the labor market is far from ‘strong’.

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%.

• July 30 FOMC Meeting: 77% probability that the policy rate will remain at 4.25–4.50% (down from 83% last week). 23% probability that rates will be 25 bps below current (up from 17% last week), which means one 25 bps rate cut.
• September 17 FOMC Meeting: 64% probability that rates will be 25 bps below current (up from 57%). This implies one 25 bps rate cut on either July 30 or Sept 17, but not both. 19% probability that rates will be 50 bps below current (implying a 25 bps rate cut at both the July 30 and Sept 17 meetings).
• October 29 FOMC Meeting: 47% probability that rates will be 50 bps below current (two rate cuts over the course of the next 3 meetings). 12% probability that rates will be 75 bps below current.
• December 10 FOMC Meeting: Roughly 40% probability that rates will be 75 bps below current. So, to sum everything up, the market is pricing in 2–3 rate cuts of 25 bps each before year end. That’s 1 cut more than Fed members are (in general) expecting.

They Said It

“We’re witnessing a housing market in transition. The era of broad-based, rapid price appreciation appears over, replaced by a more selective environment where local fundamentals matter more than national trends. For investors and policymakers alike, this shift toward geographic divergence and moderate growth may actually represent a healthier, more sustainable trajectory than the unsustainable boom we experienced just a few years ago.” — Nicholas Godec, S&P Dow Jones’ Head of Fixed Income & Commodities

“The relatively subdued sales are largely due to persistently high mortgage rates. Lower interest rates will attract more buyers and sellers to the housing market. Increasing participation in the housing market will increase the mobility of the workforce and drive economic growth.” — Lawrence Yun, NAR’s Chief Economist