INDICATOR: November Existing Home Sales and Weekly Jobless Claims
KEY DATA: Existing Home Sales: -4.3%; Year-over-Year: -1.2%/Jobless Claims: 379,000 (up 10,000)
IN A NUTSHELL: "Rising mortgage rates do matter as the surge to buy houses is starting to fade."
WHAT IT MEANS: Rates matter, especially when it comes to the housing market. For a while, the common wisdom was that mortgage rates were so low that even the spring surge wouldn't matter. Well, maybe that view needs to be reviewed. What might have happened during the spring and the summer was a normal surge in home sales as buyers got off the fence and started making offers before rates rose even further. Once that increase was satisfied, we started falling back to more normal levels of home demand. Indeed, the National Association of Realtors reported that for the third consecutive month, existing home purchases dropped. Sales were off in every region and for both single-family homes and condos. Worse, for the first time in nearly 2½ years, the sales pace was lower than it had been the previous year. That happened because demand in the West was way off its November 2012 pace. A drop in distressed property inventories may account for much of the sales weakness. In the rest of the country, demand was still up, though minimally. Prices are holding up, but the annual gains are no longer double-digit. Finally, but maybe critically, the number of homes for sale fell again. A lack of inventory may be another restraint to sales.
Jobless claims jumped again, to a disturbingly high level. However, some states reported claims increases in construction so the issue may be weather not a weakening labor market.
MARKETS AND FED POLICY IMPLICATIONS: With the FOMC starting to taper (I got that one wrong), we should expect longer-term rates and thus mortgage rates to filter upward throughout the next year. How fast will depend upon how strong the economy looks but I would not be surprised if mortgage rates broke 5% next year. But that is not very high at all (my first mortgage was 17.5%, in 1981). The increase is a problem because incomes are not rising, making it more difficult for households to qualify for mortgages. But mortgage rates are not the only factor at work. If prices continue to rise sharply, that would build equity, allowing those who had been housebound to actually sell and move. Also, the higher prices go, the more people list homes, increasing inventories and sales. So, while we need to be concerned about mortgage rates, it is not the only factor driving home sales. As for the Fed, the members should feel lucky they moved yesterday not today. Not only did we see that the key housing market is moderating but the jump in unemployment claims raises some questions about their satisfaction with the labor market improvement. I suspect that we will see claims come down over the next month but if we keep having such terrible weather, the December jobs data could be weaker than expected. That would raise the usual questions about whether the Fed had any clue about the economy. They do and we need to allow the tapering process to work itself through the ups and downs of the data. I believe that by next year at this time, the talk will be about rate hikes and that would be the clearest sign that we are back to normal.