Doom, Gloom, Kool Aid, And Warm Porridge
Mortgage rates finally broke the 8% ceiling this week after months of gradual upward movement in the 7% range. At the same time, Existing Home Sales fell to the lowest levels in more than a decade. Pretty gloomy… but there are silver linings and perhaps even some overly optimistic Kool Aid to drink. As always, we’ll try to focus on the warm bowl of porridge in the middle. It’s very true. The following charts of home sales and interest rates are not great. But unlike the last time home sales were this low, we’re in the midst of a supply shortage as opposed to a glut. That has allowed the housing market to be much more resilient in terms of home prices. In year-over-year terms, prices are already back in positive territory. We can also consider that the charts above pertain to EXISTING home sales, where the inventory depends on homeowners wanting or needing to sell. With many of those homeowners still paying the 2-3% mortgage rates obtained 2020-21, the reluctance to give that up in favor of a 7-8% rate is no surprise. That’s why the charts look much better when they focus on new home sales, which are nowhere near their 2010 levels. In fact, they’ve been trending higher and are currently in line with pre-pandemic levels. For those who want to take silver linings into potential “Kool Aid” territory, we could start to look at things like the balance of recent Fed comments which suggest the Fed is done hiking rates unless inflation flares up in an unexpected way. Just this week, that sentiment helped turn the tide after this week’s strong Retail Sales sent Fed rate expectations quickly higher on Tuesday. By the end of the week, the market saw next year’s Fed Funds Rate about a quarter of a point lower.