Skip to main content

The latest data on US home construction showed a significant deceleration in starts and permitting activity, which each fell to multi-month lows. A slowdown in homebuilding would compound suppressed transaction volumes in the much larger existing homes segment of the housing market, already dampened by surging mortgage rates. A large majority of homeowners are currently locked into mortgage rates below 4.0% while new 30-year mortgages were being financed at an average above 7.0% last week. This discrepancy has put a deep freeze on the nation’s housing inventory, which has remained particularly tight for quite some time now.

While elevated rates at the Federal Reserve are meant to crack down on inflation, a persistent shortage of available dwellings may actually begin strengthening price pressures in the CPI’s shelter component. With an index weighting of more than a third, shelter’s persistent disinflation over the last year has been a boon to the Fed’s agenda, but progress on that front risks being reversed. CPI ex shelter has already been on the rebound for several months and resurgent home prices would only add to that inflationary mix.

Related ETF: iShares US Home Construction ETF (ITB), SPDR S&P Homebuilders ETF (XHB)

Hotter than expected inflation data in the most recently reported consumer price index (CPI), paired with continually strong levels of consumption according to yesterday’s retail sales figures, suggest the US Federal Reserve’s rate path is becoming more complicated. Though the FOMC budgeted for a median expectation of three rate cuts by year-end at their March 19-20 meeting, CME’s FedWatch tool shows Fed Funds futures traders pricing the probability of three cuts or more by the close of 2024 at just 21.4% – a rapid deterioration from 64.7% this time last month. The prospect of persistently elevated rates at the Fed has echoed down the yield curve driven up longer-term rates as well. As of this morning, the 10-year Treasury yield spiked to a five-month high near 4.7%. This move in yields has pulled mortgage rates up alongside them, as Mortgage Banker Association data shows the average 30-year fixed mortgage rate bounced back above 7.0% last week.

Soaring mortgage rates and continually increasing home prices have slammed volume in the housing market throughout the past two years, slashing annual sales of existing homes to a 28-year low in 2023. Despite this slowdown, median home sale prices in 2023 increased by about 1.0% YoY to the highest level on record. Though National Association of Realtors (NAR) data shows existing home sales have posted two MoM increases to start the year, total sales throughout the first two months of 2024 is trailing the same period in 2023 by -220,000 units. February 2024 sales remained more than a quarter below February 2022 levels. Despite that drop-off in transactions recently, we’ve yet to see a material increase in supply relative to demand. In the latest month of available data, the inventory of existing homes on the market was equivalent to just 2.9 months of demand at the current sales pace. That was an 11-month low and less than half of the desired pace of 6.0 months. This imbalance is likely to keep home valuations elevated.

As MRP highlighted last week in our coverage of gold’s recent rally, housing prices are a critical consideration when it comes to the trajectory of inflation. The two shelter components within the CPI, rents of primary residences and…

To read the complete Intelligence Briefing, current All-Access clients, SIGN IN

All-Access clients receive the full-spectrum of MRP’s research, including daily investment insights and unlimited use of our online research archive. For a free trial of MRP’s All-Access membership, or to save 50% on your first year by signing up now, CLICK HERE