Existing Home Sales and New Construction Jump in February

Key Takeaways:

• The Federal Open Market Committee (FOMC) held steady the federal funds rate at its current target range of 5.25-5.5 percent at its March 19-20 meeting. The newly released Summary of Economic Projections (SEP) continued to show the median participant expects three 25-basis point rate cuts by the end of 2024, the same as in December, though the distribution now shows less propensity to ease. The March SEP also shows a modestly higher expected policy rate in 2025 and 2026 compared to December, corresponding with small upward revisions to the outlook for economic growth and inflation. While no official changes have been made to the pace of the Fed’s balance sheet runoff, Chair Powell stated that the FOMC had discussed slowing quantitative tightening at this meeting and that a slower pace is likely to be implemented “fairly soon.”
• Existing home sales jumped 9.5 percent to a seasonally adjusted annualized rate (SAAR) of 4.38 million in February, the strongest pace in a year, according to the National Association of REALTORS® (NAR). The number of homes available on the market rose 5.9 percent to 1.07 million, but the larger increase in the sales rate pushed the months’ supply down one-tenth to 2.9 percent, the lowest level in 11 months. According to NAR, the median price of existing homes sold rose 5.7 percent compared to a year ago.
• Housing starts rose 10.7 percent to a SAAR of 1.52 million in February, reversing most of January’s weather-related decline, according to the Census Bureau. Single-family starts surged 11.6 percent to a SAAR of 1.13 million, the fastest rate since April 2022. Multifamily starts rose 8.3 percent to a SAAR of 392,000, only partially reversing a 27.9 percent drop in January. Single-family permits rose 1.0 percent to a SAAR of 1.03 million, continuing a now 13-month streak of gains, while multifamily permits were up 4.1 percent to a SAAR of 487,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index increased 3 points to 51 in March, its first time above the neutral level of 50 since August 2023. The components for single-family sales in the present and in the next six months rose 4 points and 2 points to 56 and 62, respectively. The index for the foot traffic of prospective buyers increased 2 points to 34.

Forecast Impact:

The Fed’s updated SEP continued to show the median participant expecting three 25-basis point rate cuts this year, in line with our current forecast. However, we noted in our March commentary that stronger-than-expected inflation and payroll employment data may delay rate cuts and pose some upside risk to mortgage rates.

Existing home sales came in well above expectations, particularly given the rise in mortgage rates since the start of the year and the decline in pending sales of 4.9 percent in January. We will likely revise upward our near-term sales outlook due to today’s report, and we still expect a general upward trend in sales for 2024. However, the February jump may prove unsustainable. A pullback in March would not be surprising. We also note that the low months’ supply suggests that there will be continued upward pressure on home prices. The jump in single-family starts also beat our expectations and will likely lead to a modest upward revision to our near-term forecast. Still, we expect new single-family home construction will remain robust this year, consistent with another rise in homebuilder sentiment and ongoing demand for new homes. The February strength likely reflects in part a rebound from poor weather conditions in January, which suppressed activity. Consistent with this view, the typically more indicative permits series posted a more modest gain.

Nathaniel Drake
Economic and Strategic Research Group
March 22, 2024

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