Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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“Tomorrow, tomorrow…” Annie’s refrain from the iconic 1970’s musical bearing her name summarizes an increasing number of housing forecasts. As the widely anticipated spring home buying surge has failed to materialize, many analysts have begun scaling back their previously upbeat forecasts, still insisting that much better times are coming – but not today.

Fannie Mae predicts that home sales this year will be more than 1 percent below the 2013 total, which would be the first year-over-year decline since 2010. Chief Economist Doug Duncan describes that prospect as “worrisome,” but he thinks it is also temporary ― “a bump in the long-term road back toward normal levels,” which he predicts we will reach “sometime in late 2016.”

The National Association of Realtors (NAR), which is traditionally optimistic about the housing outlook ― and stubbornly so — is expecting the sales volume to slide by 3 percent this year, falling below an annualized rate of 5 million units before starting to trend upward again and rising above that benchmark next year.

The most recent housing statistics explain why so many analysts have dialed back their forecasts. Existing home sales posted their first increase in four months in April, but it wasn’t much of one. The sales volume was 1.3 percent above the March level but nearly 7 percent below May of last year. Pending sales, which seemed to be emerging from a month’s long slump with a sharp jump in April, reversed direction in May, eking out a meager 0.4 percent increase that fell well short of predictions and left this NAR index more than 9 percent lower than it was last year.

Not Impressed

New home sales provided some evidence of the expected spring rebound, with a 4.2 percent gain in April. But that failed to impress most analysts, including economists at HIS Global Insight, who noted wryly that sales had “bounced back to mediocrity.”

There was considerably more energy in the new construction category, as home starts surged by 13.2 percent, but virtually all of that increase was in multi-family construction. Single-family starts edged up by only 0.8 percent. Permits for single-family homes similarly accounted for only 0.3 percent of the 8 percent increase reported for April. And what seemed to be good news for the apartment market was tempered somewhat by concerns that a bubble might be forming there. “Investors will be fearful until these units can be absorbed,” Ron Petrik, an analyst at Stifel Nicolaus & Co., told Multifamily Executive.

Home prices, meanwhile, continue to rise, driven largely by scarce inventories in many markets. But the appreciation rate is beginning to slow. CoreLogic’s April index put prices 10.5 percent above their year-ago level. This was the 26th consecutive monthly gain, but the slowest rate of increase in more than a year. While some analysts see this as further evidence that the housing recovery is weakening, others think slower price gains will have a positive effect. “A slowdown in price gains closer to the rate of income growth will prevent housing from becoming overvalued, and therefore support a further rise in home sales and housing starts,” analysts at Capital Economics wrote in a recent report.

Affordability and Other Barriers

Some moderation in appreciation rates would also address the affordability gap that many analysts say is at least partly to blame for sluggish sales, especially in the first-time buyer segment of the market. Rising interest rate, uncertainty about the economy generally and about the employment outlook specifically and tighter underwriting standards have also weakened home buying demand, analysts agree.

Lack of confidence and distorted perceptions may also be exacerbating the problems. Nearly one-third of the respondents to a recent Loan Depot survey said they would like to purchase a home, but more than half said they haven’t tried to obtain a mortgage because they assume they wouldn’t be able to qualify. About the same percentage (53 percent) said they think it is harder to obtain a mortgage today than it was a year ago, when, in fact, credit standards have eased, Dave Norris, the president of LoanDepot, noted in a press statement. Many of these potential buyers “are forfeiting their dreams of homeownership [unnecessarily],” Norris said. “Growing the first-time homebuyer market share may be as simple as [persuading them] to go on line and explore their options.”

In the near-term, the first-time buyer market does not appear to be poised for growth, removing much of the fire power needed to drive home sales. Federal Reserve officials are watching housing activity closely, concerned that its sub-par performance, if prolonged, could create a drag on economic growth.

Testifying recently in a Congressional hearing, Fed Chairman Janet Yellen said, “The recent flattening in housing activity could prove more prolonged than currently expected, rather than resuming its earlier [recovery pace].” That risk, she said, “is something that bears watching.”

With GDP declining in the first quarter for the first time in two years, consumer confidence levels shaky, and the May labor report “solid, but not overtly positive,” in the words of one analyst, the prospect that housing will become a net negative rather than a strong positive for the economy will weigh heavily in the Fed’s assessment of how strong the economy is and how much or how little ongoing support it will need. It seems likely that Fed economists will share the consensus view (and Annie’s belief) that “the sun will come up tomorrow” — the critical question being, when tomorrow will come.