Economic & Housing Update.

• Mortgage rates improved further this week to 6.32%, but other measures of rates moved in the opposite direction amidst continued market volatility.

• Several measures of housing demand improved further—mortgage purchase applications rose 2%, Redfin’s Demand Index increased to the highest level since last May, and pending home sales for February came in better than expected at +0.8% over the month.

• Core PCE prices rose by 0.3 percent month-over-month in February, below market estimates of 0.4 percent. Consumer sentiment, on the other hand, ticked down in March to 62 from 67 in February. 

The economic data this week was minimal. The only significant data release was the personal income and outlaid data from the Bureau of Economic Analysis (BEA). This report revealed some positive progress in the Fed’s preferred gauge of inflation—core personal consumption expenditures (PCE), which removes spending on food and energy. Core PCE eased to 0.3% over the month (below the consensus of 0.4%), while January also revised down by 0.1%. This is good news. However, annually, core inflation is still up 4.6% and well above the 2% target. The Fed has much more work to do. Meanwhile, consumers are expecting inflation to continue to moderate to just 3.6% one year from now. Consumer sentiment, however, declined for the first time in four months as they increasingly expect a recession ahead (see chart). The road ahead continues to look bumpy. 

For the housing market, the story is the same. Rates have continued to fluctuate, pulling demand up and down with it. Buyers continue to be sensitive to modest weekly changes in mortgage rates (see chart). But at a monthly level, the changes are more minuscule. Pending home sales only increased by 0.8% in February but remains down 21% over the year (see chart 2). Mortgage purchase applications were a bit weaker in February and March, which could pull down existing home sales slightly. The latest Case-Shiller data on home value changes has also continued to moderate to a monthly decline of just 0.2%, seasonally adjusted (see chart 3). The seasonally-adjusted index has only fallen 3% from the peak reached last June. At the recent pace of easing, the index is likely to reach an annual decline of only 5% by this June, which would still be 12% above June 2021.  

New housing data:

• The S&P CoreLogic Case-Shiller 20-city home price index rose 2.5% year-on-year in January of 2023, the smallest increase since November of 2019, following a 4.6% rise in December, and in line with market forecasts. Miami (13.8%), Tampa (10.5%), and Atlanta (8.4%) again reported the highest year-over-year gains, but declines were seen in prices in San Francisco (-7.6%), Seattle (-5.1%), San Diego (-1.4%) and Portland (-0.5%). Compared to the previous month, house prices fell for a seventh straight month (-0.6%), with 19 cities registering a decline and continued weakness in home prices on the West Coast.

• The MBA Purchase Index increased another 2% to 172.7 in the week ended March 24th, 2023. The index is now up 19.3% from four weeks earlier. Contract mortgage rates on conforming loans declined for the third week in a row to 6.45%, the lowest level since mid-February.

• Pending home sales were up 0.8% month-over-month in February of 2023 to the highest level since August, following an 8.1% jump in January and beating market forecasts of a 2.3% fall. Sales rose for a third consecutive month, a sign the housing sector’s contraction is coming to an end. Pending home sales were up in the Northeast (6.5%), the South (0.7%), and the Midwest (0.4%), but fell in the West (-2.4%). 

• Mortgage rates slid further this week to 6.32% in Freddie Mac’s latest survey, the lowest in six weeks. MND data shows that mortgage rates remained stubbornly higher at 6.57% this week, significantly higher than the previous Friday’s 6.38%.

New economic data (source):

• Consumer Confidence unexpectedly increased in March to 104.2 from 103.4, compared with an expected drop to 101, according to the Conference Board. 

• Personal income rose by 0.3 percent from a month earlier in February 2023, easing from a 0.6 percent gain in January but slightly beating market expectations of 0.2 percent growth. The increase in income was led by rises in compensation, mainly from wages and salaries. 

• Personal spending rose by 0.2 percent from a month earlier in February 2023, following an upwardly revised 2.0 percent increase in the previous period and slightly missing market forecasts of a 0.3 percent growth. The latest increase reflected an advance of $25.8 billion in spending for services and an increase of $2.0 billion in spending for goods. Within services, increases in housing and health care were partly offset by a decrease in food services and accommodations. 

• Core PCE prices, which exclude food and energy, rose by 0.3 percent month-over-month in February of 2023, following a downwardly revised 0.5 percent increase in the previous month and below market estimates of 0.4 percent. The annual rate, the Federal Reserve's preferred gauge to measure inflation, rose by 4.6 percent, the least in 15 months, and also below market expectations of 4.7 percent, in the latest signal that inflation peaked while sparking speculation that the Fed's rate-tightening cycle could end soon. Meanwhile, the headline figure rose by 0.3% from the previous month in February, with the annual rate easing to 5.0% from 5.3%.

• The University of Michigan consumer sentiment was revised lower to 62 in March 2023 from a preliminary of 67. It was the first decline in sentiment in four months, as consumers increasingly expect a recession ahead. All five index components declined this month, led by a notably sharp weakening in one-year business conditions. The gauge for expectations was revised down to 59.2 from 61.5, and the current conditions subindex was revised lower to 66.3 from 66.4. Meanwhile, inflation expectations for the year were revised lower to 3.6% from 3.8% in the preliminary estimate, and the 5-year outlook was revised up to 2.9% from 2.8%.