Cooling Inflation and New Home Sales

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John Smith
January 1, 2023
5 min read

Both inflation and new home sales moved lower in May. Meanwhile, home prices hit another all-time high. Read on for these stories and more:

·      Inflation Cools in May

·      New Home Sales Slip

·      Pending Home Sales Continue Lower

·      Home Price Gains Remain Strong

·      GDP Decelerates in First Quarter

·      Initial Jobless Claims Decline Though Remain Elevated

Inflation Cools in May

While May’s Personal Consumption Expenditures (PCE) showed that headline inflation was unchanged from April, the year-over-year reading declined from 2.7% to 2.6%. Core PCE, the Fed’s preferred method which strips out volatile food and energy prices, rose by less than 0.1% monthly. The year-over-year reading declined from 2.8% to 2.6%, an encouraging drop for the Fed’s mandate of stable prices.

What’s the bottom line? The Fed has been working hard to tame inflation, hiking its benchmark Fed Funds Rate (which is the overnight borrowing rate for banks) eleven times between March 2022 and July 2023. These hikes were designed to slow the economy by making borrowing more expensive and lowering the demand for goods, so pricing pressure and inflation would shrink.

The Fed has held rates steady since last September because inflation had been making good progress lower late last year before stalling in the first quarter of this year. While Fed members have emphasized that they do not expect to cut rates until they’re confident that inflation is moving sustainably towards their 2% target (as measured by annual Core PCE), May’s tamer inflation readings are a welcome sign.

New Home Sales Slip

New Home Sales, which measure signed contracts on new homes, fell 11.3% from April to May, significantly missing forecasts that were expecting a rise. Signed contracts were also 16.5% lower than they were in May of last year.

What’s the bottom line? Despite the pullback in sales, demand for new construction remains strong due to the persistent shortage of existing homes for sale. On that note, more “available” supply is needed to meet buyer demand. While there were 481,000 new homes available for sale at the end of May, slightly higher than the 474,000 seen in the previous report, only 99,000 were completed, with the rest either under construction or not even started yet.

Also, the median home price fell only 0.1% from April but this was not due to falling home prices, which continue to rise nationwide per Case-Shiller and other appreciation indexes as noted below. The median home price represents the mid-price of sales, meaning it’s influenced by the mix of sales in any given month. Builders are constructing smaller, more affordable homes to meet buyer demand, and that pushed the median home price slightly lower comparatively.  

Pending Home Sales Continue Lower

Pending Home Sales fell 2.1% from April to May per the National Association of REALTORS® (NAR), coming in well below estimates of a 2.5% rise. Sales were also 6.6% lower than they were a year earlier. This report measures signed contracts on existing homes, making it an important forward-looking indicator for closings on these homes as measured in the Existing Home Sales report.

What’s the bottom line? The Pending Home Sales index took another turn lower in April after a significant drop in March, with NAR’s Chief Economist, Lawrence Yun, explaining, “The first half of the year did not meet expectations regarding home sales but exceeded expectations related to home prices. In the second half of 2024, look for moderately lower mortgage rates, higher home sales and stabilizing home prices.”

Home Price Gains Remain Strong

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices nationwide rose 0.3% from March to April after seasonal adjustment. Home values in April were also 6.3% higher than a year earlier, following a 6.5% gain in March.

The Federal Housing Finance Agency’s (FHFA) House Price Index also reported a 0.2% jump in home prices from March to April, with prices 6.3% higher than the previous year. Note that FHFA does not include cash buyers or jumbo loans, and these factors account for some of the differences in the two reports.

What’s the bottom line? “For the second consecutive month, we’ve seen our National Index jump at least 1% over its previous all-time high,” confirmed S&P DJI’s Head of Commodities, Brian D. Luke.

These indexes show that homeownership remains a fantastic opportunity for families to create wealth through appreciation gains.

GDP Decelerates in First Quarter

The U.S. economy grew more slowly than previously thought during the first quarter, per the Bureau of Economic Analysis, as their final reading of Gross Domestic Product (GDP) for that period showed 1.4% growth. While this was above the 1.3% pace in the second estimate, it is ultimately lower than the 1.6% pace in the first estimate. By comparison, we saw 3.4% growth in the fourth quarter of last year.

What’s the bottom line? GDP functions as a scorecard for the country’s economic health, so signs of a slowdown are a concern. The deceleration in GDP in the first quarter of 2024 can be attributed to declines in consumer spending, exports, and state and local government spending.

Initial Jobless Claims Decline Though Remain Elevated

Initial Jobless Claims fell by 6,000 in the latest week, with 233,000 people filing new unemployment claims. There were also 1.839 million people still receiving benefits after filing their initial claim, as Continuing Claims increased by 18,000.  

What’s the bottom line? Initial Jobless Claims trended higher in June while Continuing Claims remain near some of the hottest levels we’ve seen in recent years. The Fed will be closely watching for any rising trends in unemployment claims as they weigh monetary policy and the timing for rate cuts, given their dual mandate and price stability and maximum employment.

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