INDICATOR: March Philadelphia Fed Survey, February Leading Indicators and Weekly Jobless Claims
KEY DATA: Sales: +1.2%; Year-over-Year: +4.7%; Prices (Year-over-Year): +7.5%
IN A NUTSHELL: "Given the wicked winter, homes sales have held in quite well and with prices rising solidly, more supply is likely to come on the market, pushing demand up even more."
WHAT IT MEANS: The Fed singled out housing as a sector that remains slow, and it still is. But given the truly awful February weather, maybe conditions are not as mediocre as many think. The National Association of Realtors reported that sales rose, surprisingly, in February despite the inability of anybody in New England to actually see a home under all that snow. Indeed, demand in the Northeast fell sharply. In addition, the bitter cold in the Midwest restrained sales, which were flat. There was a strong rise in the West and a more moderate increase in the South that overcame the softness in the other two regions. That said, the sales pace remains below five million units annualized and that is not very good. Part of the problem is that buyers don't have a lot of choice. Inventories increased a bit in February, but they are really low. Given that those searching for a house don't have any incentive to rush their decision as mortgage rates continue to be stable, the lack of supply is restraining sales. No bad deed goes unrewarded and without much choice, prices are rising very solidly. That is good news as more and more homeowners are finding that their equity has risen to the point where they can sell their homes and maybe even buy a different one. When that starts happening, the "churn" in the market will return and we will start seeing more decent levels of sales.
MARKETS AND FED POLICY IMPLICATIONS: This was a surprisingly good report as the winter weather argued for a lower sales pace. But the Fed is correct; the housing sector is not in great shape. That doesn't mean the Fed shouldn't hike rates. Rising mortgage rates not only are not a sector killer, but I actually believe they would improve conditions. As I noted above, those searching for houses only have to worry about finding the right place at the right price. They don't have to factor in changes in mortgage rates. That allows them to be more selective and not rush the process. But if mortgage rates rise, that would all change. In the past, when rates started rising, buyers were pushed off the fence and at least for a while, demand jumped. There is no reason to think that behavior will not be repeated in this rate cycle. Yes, some will be priced out of the market. But it is not new homebuyers that are the problem with the market. What is missing is the churn, where people who already own houses decide they want to move, for whatever reason that may be. There has been very little of that for about seven years and as prices rise and equity builds up, the urge to move will come back. That is when we will be back in a normal market. So I actually believe it will be good for housing if rates finally start moving back to more reasonable, longer-term levels. But the Fed isn't hiking rates just yet, so investors will not likely focus too much on the housing data. It's all about jobs and wages and inflation. Tomorrow's Consumer Price Index report will be more important. Next week's Personal Consumption Expenditure Price Index and the March employment report, where we get some wage data, could be market movers.