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Soft activity, strong pricing

Category : Uncategorized

Mixed messages
The housing data at the start of the year have been mixed. Existing home sales
have declined an average 2.2% mom SA over the prior three months. Mortgage
purchase applications have inched higher, but not in a convincing manner. New
home sales have moved sideways while the NAHB homebuilder index softened.
This sluggish tone to the activity data contrasts with the improving economic
backdrop. The labor market has been exceptionally strong with job growth
averaging 284,000 a month for the past six months and the unemployment rate
reaching 5.5%.
The opposite has been true for prices with recent data surprising to the upside. The
CoreLogic home price index jumped 1.1% mom SA in January, pushing the YoY
rate up to 5.7%. Housing inventories have been lean while mortgage rates have
declined, supporting prices. The data are also influenced by poor seasonal
adjustments which seem to bias the figures higher during the winter and lower
during the spring. Given this noise in the data, we are holding to our view that price
appreciation will slow, reaching 4.0% by year-end.
It is hard to make sense of these data – why is home price appreciation accelerating
amid weakening home sales? Perhaps one explanation is that the housing market is
still bifurcated with homeownership limited to the upper income cohort who has
access to credit and wealth gains. The lower income households are likely to be
renters longer. We have already seen a dramatic shift in how households are living
with the homeownership rate back at historic lows. The risk is that the adjustment is
not yet over.

Silver Lake Los Feliz