Morning Report: Home Price Appreciation stalls

Vital Statistics:

 LastChange
S&P futures4,0419.00
Oil (WTI)77.45-0.47
10 year government bond yield 3.50%
30 year fixed rate mortgage 6.15%

Stocks are higher as earnings continue to come in. Bonds and MBS are up.

House prices fell 0.1% MOM and rose 8.2% YOY according to the FHFA House Price Index. “U.S. house prices were largely unchanged in the last four months and remained near the peak levels reached over the summer of 2022,” said Nataliya Polkovnichenko, Ph.D., Supervisory Economist, in FHFA’s Division of Research and Statistics. “While higher mortgage rates have suppressed demand, low inventories of homes for sale have helped maintain relatively flat house prices.”

The West Coast is experiencing the biggest slowdown, followed by the Mountain States. Some of these MSAs like Boise became completely disconnected from the local economy and prices will almost certainly contract to what the local economy can support.

Home prices fell 0.5% MOM according to the Case-Shiller Home Price Index. “November 2022 marked the fifth consecutive month of declining home prices in the U.S.,” says Craig J. Lazzara, Managing Director at S&P DJI. “For example, the National Composite Index fell -0.6% for the month, reflecting a -3.6% decline since the market peaked in June 2022. We saw comparable patterns in our 10- and 20-City Composites, both of which stand more than -5.0% below their June peaks. These declines, of course, came after very strong price increases in late 2021 and the first half of 2022. Despite its recent weakness, on a year-over-year basis the National Composite gained 7.7%, which is in the 74th percentile of historical performance levels. As the Federal Reserve moves interest rates higher, mortgage financing continues to be a headwind for home prices. Economic weakness, including the possibility of a recession, would also constrain potential buyers. Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”

Note the FHFA House Price Index only looks at homes with a conforming mortgage, which means it excludes jumbos and cash-only sales. Since we are seeing a big decline in luxury home sales, that might explain the difference between FHFA and Case-Shiller.

Employment Costs rose 5.1% YOY, according to the Employment Cost Index. Wages and Salaries rose 5.1% while benefits rose 4.9%. Given the Fed’s laser focus on wage-push inflation, this number will be somewhat concerning. That said, the quarterly gain fell from 1.2% to 1.0%. The number was below Street expectations.

Consumer confidence fell in January, according to the Conference Board. “Consumers’ assessment of present economic and labor market conditions improved at the start of 2023. However, the Expectations Index retreated in January reflecting their concerns about the economy over the next six months. Consumers were less upbeat about the short-term outlook for jobs. They also expect business conditions to worsen in the near term. Despite that, consumers expect their incomes to remain relatively stable in the months ahead. Meanwhile, purchasing plans for autos and appliances held steady, but fewer consumers are planning to buy a home—new or existing. Consumers’ expectations for inflation ticked up slightly from 6.6 percent to 6.8 percent over the next 12 months, but inflation expectations are still down from its peak of 7.9 percent last seen in June.”

More evidence of a slowing economy: Shipper UPS reported a decline in revenue in the fourth quarter compared to a year ago. CFO Brian Newman said that 2023 should be a bumpy year, although the second half should be better than the first.

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