Just a cursory look at the numbers gives the impression that the US housing market is having some troubles.
So far, there have been three consecutive months of declining sales, and expectations indicate a further decline in January. But, a closer look shows that the market appears to be having a “good” problem: there just aren’t enough houses to buy.
Mortgage rates are just 18 basis points away from record lows (last time being early 2013), and demand for housing continues to increase. A logical consequence of record unemployment and steady wage growth.
But, there appears to be an offset between supply and demand: buyers are looking for more affordable housing, while apparent demand is pushing prices higher.
The Trend & the Gap
Median home value in the US stood at a record of $245.193 at the end of January, a 3.8% yearly increase (by comparison, inflation registered 2.3% during the same period).
Projections are for the value of homes to increase by 4.1% over the next year, leading many experts to call it a seller’s market.
On the other hand, the median listing prices for houses has increased by over 6% in the same period, widening the gap between how much people want for homes compared to how much people are actually willing to pay.
With most major housing construction companies such as Lennar and DR Horton selling well above the median, the majority of new homes coming on the market are priced higher than the median price demand.
Last month, for the first time in almost a year, housing inventory ticked higher.
What Does that Mean for the Markets?
Generally, the report on new home sales doesn’t have a major immediate impact on currencies.
However, it’s an important measure of economic health and long-term bond yield trends. The bottom line is that yield is what moves currencies.
With a search for safe havens due to economic concerns around COVID-19 and lingering trade effects, US yields are an important factor propping up the dollar. Continued declines in new home sales is an argument for further rate cuts by the Fed, which is growing to be an issue lately.
Mortgages are dependent on the far right of the yield curve, which has been falling for a while now. The curve has once again inverted, but after all the fanfare around the last time fizzling out, few are paying attention to it. However, the outlook for US interest rates according to the markets is for an extended period of easing.
We should remember that yield curve inversion is said to predict a recession within 6 to 24 months – and we are well within that window now.
What Are We Looking For?
For the data release, expectations for the total number of new homes sold to remain practically flat at 697K compared to 694K in December.
However, when adjusted for seasonal effects, this would imply a decline of 1.5% compared to -0.4% in the prior measurement. That would be less than half of the total housing starts as reported last week.
Building permits hit a record high at the end of the year, even as actual house transactions continue to decline. Demand remains healthy; inventory of sub-$200K houses dropped by over 10% in the last year. But those aren’t the kind of houses being built.