Low Temperatures and Low Inventory Put a Freeze on Home Sales

Homebuyers faced a double whammy in February as both low inventory and freezing temperatures hindered home sales. Meanwhile, consumer inflation remained tame and Initial Jobless Claims hit a milestone.

The Lowdown on Low Inventory of Existing Homes

Existing Home Sales, which measure closings on existing homes, fell 6.6% from January to February. However, sales were up 9.1% year over year.

Low inventory remains a challenge across the country, as there were just 1.03 million homes for sale at the end of February. This equals a 2-months' supply of homes, just above the record low of the 1.9-months' supply that was available at the end of January. Inventory is almost 30% lower than it was in February of last year. With this stiff competition, properties sold in 20 days on average, which is another record low.

The median home price was $313,000, up almost 16% year over year. Note, this is not the same as appreciation. It simply means half the homes sold were above that price and half were below it. Sales on the low end were down 25%, while homes above $1 million were up 81%. This dragged the median home price higher.

Even with the stiff competition for lower-priced homes, first-time homebuyers accounted for 31% of sales in February while cash buyers increased from 20% to 22%. Investors purchased 17% of homes, up from 15%.

Lawrence Yun, chief economist for the National Association of REALTORS, said, "I still expect this year’s sales to be ahead of last year's, and with more COVID-19 vaccinations being distributed and available to larger shares of the population, the nation is on the cusp of returning to a sense of normalcy. Many Americans have been saving money and there's a strong possibility that once the country fully reopens, those reserves will be unleashed on the economy."

Winter Weather Puts a Freeze on New Home Sales

New Home Sales, which measure signed contracts on new homes, were down 18.2% in February, which was much softer than expectations looking for a 6% drop. However, sales are still up 8.2% on a year over year basis.

What caused the sharp decline from January to February? Freezing weather around the country certainly played a role, as did low inventory, as there was just a 4.8 months' supply of homes available for sale at the end of February. Quite simply, if there were more homes available, we would have seen more sales.

The median home price was reported at $349,400, up 5.3% from last year. Again, this is not the same as appreciation. It simply means half the homes sold were above that price and half were below it.

Inflation Remains Tame … For Now

Inflation rose 0.2% in February, which was lower than the 0.3% expected, per the Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE). Year over year, the index increased from 1.4% to 1.6%.

The Fed's real focus is Core PCE, which strips out volatile food and energy prices, and that was up 0.1% in February, as anticipated. On an annual basis, the Core rate decreased from 1.5% to 1.4%, just below expectations of 1.5%.

While inflation remains tame for now, we expect annual inflation to rise above 2% in May, June, and July as the readings for the more current months replace the older readings from 2020, where inflation was low due to the pandemic and economy shutting down.

This is significant because inflation is the arch enemy of Mortgage Bonds and home loan rates, which are tied to them. Inflation reduces the value of fixed investments like Mortgage Bonds, so rising inflation can cause Mortgage Bonds to worsen or move lower. Home loan rates are inversely tied to Mortgage Bonds, so when Bonds worsen home loan rates can rise. It will be important to closely monitor this dynamic throughout the spring and summer.

Also of note within the report, Personal Income was down 7% in February after a 10% rise in January, while Personal Spending fell 1% after a rise of 3.4% over that same period. The increases in January correlate with December's $900 billion stimulus package, with the declines in February showing the effects of that stimulus starting to wear off.

Historically, we usually see the effects of stimulus plans completely start to wear off after six months. With the most recent $1.9 trillion stimulus plan, the benefits will likely be gone by October…unless additional stimulus is passed such as the $3 trillion infrastructure plan that is being discussed.

Seeing the Whole Picture on Jobless Claims

The number of people filing for unemployment for the first time decreased by 97,000 as Initial Jobless Claims fell to 684,000 in the latest week. This was the first time the number of Initial Claims fell below 700,000 since the pandemic began. California (+96K), Texas (+80K) and Ohio (+69K) reported the largest number of claims.

Continuing Claims, which measures people who continue to receive benefits, also dropped by 264,000 to 3.9 million.

While these declines sound positive at first glance, it's important to view them in context.

Pandemic Unemployment Assistance Claims, which provide benefits to people who would not usually qualify, increased by 120,000. Pandemic Emergency Claims, which extend claims after regular benefits expire, also increased by 735,000.

As a result, 19 million people are still receiving benefits throughout all programs, which is actually an increase of 734,000 from the previous week – and still significantly higher than the 2 million people who were receiving benefits through all programs in the comparable week last year. The bottom line is that we still have a long way to go before the labor sector reaches pre-pandemic levels of employment.