Confidence among U.S. single-family home builders fell for a record 12th straight month in December as even a scramble to offer incentives for prospective buyers failed to boost traffic and lift sales in today's high-inflation, high-interest rate environment.
The housing market is in a “sales swoon”. Sales are poor but not as bad as past recession levels (gray bars in the Reuters graph).
Yet among actual consumers, “Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.
This tells us what is happening in our economy is totally at odds with current Federal Reserve policy. The public sees good times ahead, in part because inflation has been declining.
The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs, said Franco. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus.
There were some indications the decline in builder confidence is nearing a bottom, as the gauge of sales expectations over the next six months rose four points to 35.
"The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment," said Robert Dietz, NAHB's chief economist. "Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations."
Existing-home sales also declined for the tenth month in a row in November, according to the National Association of Realtors®. All four major U.S. regions recorded month-over-month and year-over-year declines.
This is with sky-high interest rates just in the past six months.
“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020,” said NAR Chief Economist Lawrence Yun. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows.”
The demand for housing continues to outpace supply, Yun said. Half of the country may experience small price gains, while the other half may see slight price declines, Sales through October of this year are just shy of 4.4 million, and Yun estimates the 2022 total will reach 5.13 million units when November and December data are reported, down by more than 16% from 2021's 6.12 million.
Economists and pundits are sounding the alarm concerning a Federal Reserve-induced recession if it won’t start looking at the future instead of the past, since future inflation expectations, a key indicator, have been declining rapidly, “to the lowest level since September 2021”, per the Conference Board survey.
Even Nobel Laureate Paul Krugman remarked on this recently.
“What many economists probably have in mind, however, is something else," he said in a recent blog post. "They’re worried about inflation getting “entrenched” in the economy. Textbook models of inflation say that once businesses and workers have come to expect persistent inflation, that inflation becomes self-perpetuating, because people set prices and wages based on the belief that everyone else will be raising prices and wages in the future. And once inflation has become entrenched, the story goes, getting it down again requires a nasty economic slump.”
People do expect elevated inflation over the next year, probably because they’re extrapolating from elevated gas prices earlier this year, said Krugman. But medium-term inflation expectations are quite low. There’s just no sign of inflation getting entrenched.
So Fed Governors beware. Look to the future if you want a picture of the real economy.
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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