Market Update as of February 27, 2019

Market Highlight
Fed Chairman J Powell gave an overall bond-friendly testimony to members of the Senate Banking Committee and did not venture far from the communications we have already received from the Fed over the past 2 months.  J Powell cited the economy is growing at a solid pace and highlighted the strong labor market conditions and recent wage growth.  He also said the Committee is concerned about downside risks to the economy presented by ongoing trade tensions, Brexit, and to a much lesser extent, the partial government shutdown.   With these issues remaining uncertain, the Fed will maintain a “patient” approach to further rate hikes and will “adjust any of the details for completing balance sheet normalization” as needed.  While the Fed views the “current economic conditions as healthy and the economic outlook is favorable”, the US housing market continues to weaken further, as  US homebuilding tumbled to more than a two year low.  Housing Starts in January dropped by 11.2%, with downward revisions to the previous month. Building Permits, FHFA Price Index, and Case-Shiller Home Prices were also weaker than expected.    Last week, a report showed the existing homes sales also dropped to the weakest pace since 2015.  Clearly, affordability remains strained despite the 60bps rally in interest rates at the beginning of the year and consumers have been whipsawed by stock market volatility, trade wars, and the partial government shutdown. 

Existing Home Sales Hit 3 Year Low
After NAHB's optimism rebounded sharply earlier this week, all eyes are on this morning's existing home sales data for any signs of optimism. Alas, with consensus expecting a tiny rebounding in January following December's sharp drop, the deterioration in the US home market continued, and January existing home unexpectedly dropped 1.2% (exp. +0.2%), to 4.94 million, missing expectations of a rebound to 5.00 million.  After December's revision higher to 5.00 million, the January SAAR of 4.94 million was the first sub-5MM print since 2015, while the parallel pending home sales series confirms even more weakness is in store.

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New Construction Declines
The number of homes being built in December plunged to the lowest level in more than two years, a possible sign that developers are anticipating fewer new houses to be sold this year. The Commerce Department said Tuesday that housing starts fell 11.2 percent in December from the previous month to a seasonally adjusted annual rate of 1.08 million. This is the slowest pace of construction since September 2016. Over the past 12 months, housing starts have tumbled 10.2 percent. December's decline occurred for single-family houses and apartment buildings. Builders have pulled back as higher prices have caused home sales to slump, suggesting that affordability challenges have caused the pool of would-be buyers and renters to dwindle.


Prices Are Chilling Out
Today’s Case-Shiller home price index showed a rapid deceleration in home price growth for December. It’s good though. Prices are coming down, especially in prime urban real estate as affordability has left buyers unwilling to step up their offers. The thinning out of buyers, especially at the high end, is probably a good sign. For people worried about housing based off this data, I would say relax. Would you rather have buyers thin out as prices increase or have buyers stretch their credit to be able to afford that slightly pricier pad? You want demand to respond to changes in prices.

China’s Workforce Decreasing At An Alarming Rate

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Courtesy of Sotheby's International Realty's in-house Lender Simon Atik, 310.880.8414, Simon.Atik@grarate.com, Vice President of Mortgage Lending, Guaranteed Rate Affinity.

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