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Fed faces housing conundrum

Housing permits have dipped, pending home sales are weak and affordability is in question.

US FEDERAL Reserve chair Jerome Powell may have a problem on his hands.

Buoyed by three interest-rate cuts, the US housing market not only stood as a pillar of economic support in 2019, it largely offset the protracted slowdown in business investment. Now, cracks have begun to appear in housing.

Focusing solely on forward-looking indicators of residential real estate, building permits in the south and north-east, which account for about 60 per cent of permits, fell in December 2019.

As for what is to come on the sales side, pending homes sales fell by 4.9 per cent, the steepest decline in a decade.

Neither of these data points place housing at risk. The 5.8 per cent gain in residential real estate that supported fourth-quarter gross domestic product topped the third quarter's 4.6 per cent of GDP that had followed a contraction in seven of the prior eight quarters.

Even as consumption has faded, this strength should hold. December was one of the warmest for that month on record, and construction data released for that month indicates residential's contribution to GDP was even higher than initially reported, which will lead to an upward GDP revision.

December 2019 single-family housing starts were the most in 13 years. Even with this strength, it is hard to ignore the dip in housing permits and weakness in pending home sales.

While many factors are at work, affordability is key. The downside to the Fed's tightening campaign throughout 2017 and 2018 was also its silver lining.

In March 2018, just as Mr Powell was getting settled two months into office, gains in home prices as measured by the S&P CoreLogic Case-Shiller index topped out at 6.5 per cent over the prior 12-month period.

In the 17 months that followed, through last August, those gains decelerated to a 3.1 per cent rate.

This prompted some to ask whether millennials, turning 30 years old at a rate of five million per year, would finally be able to afford the dream of home ownership in mass numbers.

That easier entrée was arrested, though, in September as home-price gains accelerated, ending November at a 3.5 per cent rate, a six-month high.

The market for existing-home sales has been even less forgiving on the price front.

Median home prices were up 7.8 per cent in December from the year before, which explains why first-time homebuyers comprised an anaemic 31 per cent of purchasers, compared with more than half at the peak of the last housing cycle.

Slower home-price appreciation can be had in one of two ways: either via rising mortgage rates or a slowing economy. The downside is that neither is beneficial to the broader housing market. This defines the dilemma that has emerged for the largest generation of potential homebuyers since the baby boomers came of age.

Artificially repressed rates have perverted what was once a market driven by supply and demand. Bleakley Advisory Group chief investment officer Peter Boockvar noted that investors made up 17 per cent of purchases, up from November's 16 per cent share and 13 per cent a year ago.

Mr Powell may have something even worse on his hands than the deterioration in affordability.

For the best real-time and cleanest take on the state of the nation's job market, always look first to non-seasonally adjusted continuing jobless claims.

This figure is a pure reflection of the number of Americans covered by unemployment insurance who have applied for it and been approved and are collecting said insurance.

In 2019's last three months, continuing claims on this basis rose 1.9 per cent from a year earlier, and were up 1.3 per cent in the first three weeks of January. These are the first increases seen since 2009.

This brings us back to the Fed. Speculation that the expanding coronavirus will cause the global economy to slow has sparked a rally in fixed-income assets, causing market-based rates to decline, including mortgage rates.

Traders have priced in a rate cut by the Fed to happen somewhere between July and September. But the last thing a hesitant Mr Powell needs right now is a market demanding lower benchmark rates.

The only crueller fate would be rising joblessness clogging the transmission of lower rates to boost the critical and highly interest-rate sensitive housing market. BLOOMBERG