Pending Home Sales dropped from last month and are at the lowest levels in a year, but as you can see from the above graph, there are still more homes under contract than this time last year.  Case Shiller reports that home prices around their 20 city sampling increased 5.6% from 12 months ago.  Much to many shopping first-time home buyers’ dismay, housing continues to be a strong point.

Weakness is being seen in the second GDP snapshot which showed 1.9% growth, where a 2.1% appreciation rate was expected.  Hopes for the 2017 year as a whole are still in the 2.25%-2.5% range. 

The pace of new home sales continue to accelerate through the winter months, though the snow has stifled last month’s expansion to 3.7%.  New Home Sales rose 12% in 2016, the quickest growth in 10 years.  It’s probably a good thing to note here that new homes make up just 10% of the overall market.  It’s getting more expensive to buy that new home smell: the Median Home Price for a new home is $312,900, a jump of 7% from this time last year. By comparison, the Median Home Price for an existing home is quite a bit lower at $228,900.  New carpet and new paint is good enough for an increasingly larger majority of the population: the number of Existing Home Sales increased 5.69% last month.  Buying a home is still one of the smartest things you can do for yourself.  The forecasted appreciation rate for a home in Utah for the 2017 year is 4.8%, which is higher than the cost to borrow the money to finance it.  It’s a good time to lock in that fixed rate still!  

Correlation?

The number of Existing Home Sales rose 3.3% last month, and are up 3.8% from last year at this time.  The median home price however, rose 7.1% to $228,900.  Nationwide, there is only a 3.6 month supply of homes on the market.  Mortgage applications for home purchases are down 2.0% from last month, but up 9.5% from last year.  Over the last two years, mortgage rates have come down and the number of sales have come up.  It will be interesting to see what happens to home sales now that rates are heading north again.

It is both intriguing and discouraging how quickly our little brains forget the things that we learn and we regress to become entrenched again in our personal agendas.  After last week’s congressional testimony by Janet Yellen, the perceived likelihood of rapid rate hikes these next few meetings was a virtual certainty.  Throw a three-day President’s Day weekend at those trading money for a living however and that confidence wanes significantly.  Today’s Fed Fund futures polls are predicting only a 17.7% probability for a March 15 rate hike, a 44.1% chance of a hike on May 3, and a 69.9% expectation for a 0.25% advance on June 14.  It’s like the classic kids’ party game where the target is right in front of you, but after putting on a blindfold, you lose all sense of reality.

The fundamentals only confirm that the economy is ripe for higher interest rates.  The National Association of Realtors said that existing home inventory has declined by 22% in the last six months. Lower supply=higher prices.  Housing isn’t the only winner here, the S&P has gained 13.3% in the last three months.  Higher prices, higher wages, and higher employment rates=inflation.  And inflation=higher interest rates.  Even the donkey can see that.     

Pulling away from the Fed, let’s take a look at the housing market.  The National Association of Home Builders shows that new construction continues to be very strong in the absence of existing homes available for sale.  Sure Housing Starts are down 2.6% from last month, but last month showed a monster 11% increase from the month before.  Rest assured that the 1.246 million new homes being built per year is above market expectations.  And it looks like the trend will continue: Housing Permits rose 4.5% to a 1.285 million unit pace, which is the highest figure in over a year.  Leading the way though is multi-family dwelling construction (apartment buildings), which rose 19.8% from just last month.

Another sector of the economy doing very well is manufacturing.  The Philly Manufacturing Index rose a whopping 20 points to 43.3, soaring above expectations to the strongest reading since the Reagan era in 1984.  Again it appears that the threat of higher taxes on foreign business activities is helping to revitalize a sleepy sector.

After being beaten down over the last seven days, mortgage bonds are attempting to rebound this morning–keeping rates steady for now.  

Since Chair Yellen is testifying before the House Financial Services Committee this morning and is essentially giving the same message that she did yesterday before the Senate, it’s probably a good idea readdress her address.  Over the last few years, she has mostly focused on the constraints currently keeping interest rates lower, and the disadvantages associated with raising prematurely.  That tone today has been changed to focus on the benefits of raising interest rates sooner rather than continuing to wait.  Ms. Yellen re-affirmed the Fed’s three-hike plan in the year 2017.  Fed Fund Futures place a 30% chance of a rate hike in March, a 50% chance in May, and a 100% chance for June.  Aside from raising short term rates, the Fed will also allow long term rates to rise by phasing out their current repurchase plan after enacting the three bumps–especially in mortgages holdings–by allowing their current $4.5T balance sheet to taper down significantly next year.  If you are on an ARM, you’d better have a pretty solid exit strategy.

Ever the hopeless romantic, Fed Chair Janet Yellen testified before Congress this morning.  With passion visible in her batting eyelashes, she said that it would be unwise to wait too long before raising interest rates.  Her voice tender with emotion, she also said that the Fed will be selling off their holdings in mortgages–the Fed has been reinvesting almost $9,000,000,000 every week into mortgage bonds, helping to keep interest rates low.  A separate, but equally affectionate speech in Delaware by Fed Bank President Jeffrey Lacker was going on simultaneously, in which he said that given the current employment and inflation levels, “significantly higher rates are warranted”.  Doesn’t that jsut melt your heart?  This morning’s 13% chance of a Fed rate hike in March will probably surpass the 50% mark by the next poll.  Mortgage Bond Traders have decided to beat the Fed to the punch and have already begun selling off: currently pushing prices down 50 bps.  Mortgage pricing falls to the floor, even if love is in the air today.    

Fed Chair Janet Yellen is set to address Congress twice in the next two days.  We all wait for clues about whether the Fed will hike rates in March or not.  She has committed to three interest rate hikes this year and there are only five more Fed meetings with a press conference scheduled after them.  So the odds are pretty good that we see a bump up in March. In an unrelated speech last Saturday, Fed Vice-Chair Stanley Fischer told the crowd that even though the economic indicators are very close to the Fed growth targets, there is still significant uncertainty about upcoming fiscal policy.  You know who dealt well with uncertainty?  Rambo.  He would never have waffled.

In honor on Valentine’s Day and the love that our illustrious leader has in his heart for business, President Trump announced that he will make an announcement on a “phenomenal” (his word) corporate tax cut within the next three weeks.  Lower taxes of course mean greater earnings for corporate America, and investors are beside themselves with amour, driving the price of stocks up to fresh collective highs. That puts upward pressure on interest rates, which seek to compete for the same investment dollars from would-be suitors. 

Defecit Spending

Here is a breakdown of the sectors producing our $192B trade deficit.  As a country, we are purchasing more than we are producing.  I honestly don’t understand all of the implications to our country, but I do understand what happens to a family when you spend more than you make, and the repercussions are disastrous.

Looking at the financial markets, the large majority of investors are of the opinion that the stock market will continue to go up, while a slim minority believe that they are overbought and ready for a decline.  Fundamentally, if most investors have their money already in a particular market, that doesn’t leave much capital available to drive prices higher; consequently, prices will stagnate.  That’s what’s happened with the stock market rally and all the excitement over the DOW reaching 20,000.  There is no more momentum to drive prices higher because is no more money shifting into stocks.  Should enough people get nervous and look to protect their stock-heavy portfolio, the market will correct and a lot of money will come out of stocks and into bonds, lowering the collective price of stocks and driving interest rates back down as bonds are scooped up for their perceived safety.  I’m not saying that it’s going to happen, but there appears to be a possibility.  And possibilities are what dreams are made of–in my case, that’s low rates. Plus, I want to buy me one of those foreign-made cars.   🙂