What the spike in home sales means

Rent inflation is down…home sales soared in February…another troubled bank…stretched budgets whether you’re a retiree or Gen Z

There is good news on the inflation front, although when contextualized it loses some luster.

Housing costs are the largest component of the Consumer Price Index (CPI) – about 33%. Thus, its movement has an exaggerated effect on the CPI.

On Tuesday, we learned that rent increases for single-family homes just arrived at their lowest annual rate since the spring of 2021.

Here is Bloomberg with more:

Nationally, the typical rent for a single-family home rose 5.7% from a year earlier, according to data from the real estate analytics provider.

The 20 major metropolitan areas tracked by CoreLogic posted single-digit annual rent increases, for the first time since late 2020.

Keep in mind that this cooling does not yet show up in the CPI numbers due to lags in the way the numbers are calculated. So, as we approach spring, we should see the effect appear in the official CPI data.

Clearly, this is good news. What’s the “worse” part?

Remember the difference between rent inflation and absolute rent prices. Inflation – which measures changes in prices – can be very low while the price itself remains high (because it does not change much).

Thus, when we analyze inflation, we must translate it into its practical impact on the American consumer, since consumer spending massively influences the health of our economy.

On that note, here’s Market surveillance:

Rental price growth may be slowing — but housing was actually less affordable for renters in February than a year earlier, according to a new report from Realtor.com.

February marked the seventh consecutive month of single-digit rent growth, and the median rent in the nation’s 50 largest metropolitan areas edged up 3.1% from the same period in 2022.

However, rental prices were nearly 21% above 2020 levels, according to Realtor.com.

February’s median rental price of $1,716 is down $1 from January — and that’s probably not much comfort to renters facing $296 extra monthly costs compared to before the pandemic.

Now, over the past two years, the rental market has seen higher rates in part due to potential buyers being shut out of the home buying market.

So what’s the latest in housing affordability? And by extension, what does this mean for rental rates?

On Tuesday we learned that home sales had skyrocketed in February

Sales exploded 14.5% from January to February. This is the first monthly gain in 12 months and the largest increase since July 2020.

For a little more context, sales were still down 22.6% from the same time last year. Despite this, the strong monthly increase attracts attention.

What’s behind? And what does that mean?

Here is CNBC:

These sales counts are based on closings, so contracts were likely signed in late December and throughout January, when mortgage rates had fallen sharply.

The average rate on the popular 30-year fixed loan hovered around 6% throughout January after hitting a high of 7% last fall.

The relative decline caused new home sales to jump, before rates rose to around 7% in February.

As I write Thursday, Bankrate reports that the current average interest rate for the benchmark 30-year fixed mortgage is 6.85%, so we are higher than in January.

But the surge in purchases is not based solely on lower financing costs. In February, year-over-year home prices actually fell for the first time in more than a decade.

Here is The Wall Street Journal:

The national median selling price for existing homes fell 0.2% in February from a year earlier to $363,000, the first year-over-year decline since February 2012.

Median prices, which are not seasonally adjusted, fell 12.3% from a record high in June.

This explosion in purchases reveals how much demand for housing remains today. And in a vacuum, that would suggest there’s a limit to the decline in home prices, as so many eager buyers sit on the sidelines, waiting to rush in.

By extension, this would suggest a limit to our gains on housing affordability… which would continue to depress the price of some potential buyers… which would relegate them to the rental market… which would prevent rents from falling too much.

But, again, it’s “in a vacuum”. How it actually plays out could be a lot more complex.

back to WSJ explain:

In the near term, any drop in mortgage rates should further boost home buying activity, said Orphe Divounguy, senior economist at digital real estate firm Zillow Group Inc.

But if turmoil in the banking sector makes consumers more worried that the economy is entering a recession, it could weigh on demand, he said.

Banks could also tighten lending standards, making it harder for homebuyers to get mortgages, Capital Economics said in a note to clients.

Speaking of ‘trouble in the banking sector’, yesterday we brought details of a new troubled bank

Go to Bloomberg:

PacWest Bancorp is set to bolster its liquidity to protect itself after customers withdrew 20% of their deposits year-to-date.

The regional bank, whose shares have fallen 58% this month, secured $1.4 billion in a funding facility from Atlas SP Partners and abandoned a separate campaign to raise capital due to the market volatility, she said in a statement on Wednesday.

PacWest’s problems mirror those we’ve seen recently at other regional banks.

Soaring interest rates hampered the value of PacWest’s bond portfolio. Meanwhile, cash needs from customer withdrawals forced the bank to sell some of its bonds, locking in big losses.

Here is Bloomberg with the size of PacWest’s recent borrowings to keep its doors open:

PacWest has already borrowed $3.7 billion from the Federal Home Loan Bank System, $10.5 billion from the Federal Reserve’s discount window and $2.1 billion from the bank’s term funding program as of March 20.

Although it looks like PacWest has stabilized, Moody’s Analytics Chief Economist Mark Zandi thinks more pain lies ahead for the broader banking industry.

Here it is from his interview with CBS News Tuesday:

When you raise interest rates and you raise them as fast as the Fed did and as high as they did over the past year, things are going to start to wobble and break and it will be uncomfortable…

It’s gonna get bumpy. And I don’t think it’s over.

Inflation is still high. The Fed has yet to bring inflation back.

And so, the next 12 to 18 months are going to be uncomfortable.

New Fidelity report reveals ‘uncomfortable’ conditions for the average retiree today

On Tuesday, investment giant Fidelity released its 2023 Retirement Savings Assessment Report.

Here are some takeaways from Fox Business News:

[The report] shows that the retirement score for the average US household has fallen into the “correct” range, with more than half of those surveyed, 52%, not having enough savings to cover day-to-day needs when they leave the labor market.

Fidelity found that more than a third of Americans, or 34%, will need to make “significant adjustments” to be able to afford retirement, while 18% currently need moderate changes to save enough for essentials.

Another 16% should be able to cover essential expenses, but not discretionary spending on things like travel or entertainment.

It’s not just older Americans who are struggling. According to a new report from Credit Karma, Gen Z just saw the biggest increase in average debt levels of any generation.

Here is Bloomberg with more:

With decades of inflation outpacing wage growth in most parts of the United States, consumers are increasingly relying on credit cards to make up the difference.

But Gen Z workers on entry-level salaries are finding it harder than their older counterparts to keep up with the soaring cost of living.

While average credit card debt was lowest for younger borrowers at $2,781, growth outpaced all other generations at 5.9%.

Gen Z drivers also saw the largest increase in car loan debt at 2.3%.

Let’s refocus on the Fidelity report and retirees by ending on a more optimistic note

If you’re retired or approaching retirement with a respectable nest egg but need cash, you have great options for high-yield savings accounts that keep your cash flowing.

An example is UFB Direct (we have no affiliation with them). They offer an FDIC-insured savings account that pays an annual percentage return of 5.02%. To be clear, this is not a CD or some kind of instrument with a lock. You have full liquidity.

If your challenge isn’t so much ‘cash flow’, but the size of your nest egg itself, that’s where our InvestorPlace experts can help.

On that note, a quick cheer at Louis Navellier Accelerated benefits the subscribers. On Tuesday, they locked in partial gains on three positions, each returning over 40%.

It’s just a reminder that although we are not in a market where “the rising tide lifts all ships”, there are still some good returns out there if you know where to look.

Have a good evening,

Jeff Remsburg