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Economic Watch: Home Sales, Consumer Sentiment Rise as Fed Mulls Rake Hike

February 24, 2017

By Evan Lockridge

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There are increasing signs the U.S. economy is gaining momentum in the first quarter of the year with gains in home sales and consumer confidence, but it is also fueling speculation that interest rates could head higher as soon as next month.

Sales of new homes surged 3.7% in January from the month before to an annual rate of 555,000, according to a Commerce Department report released Friday. That figure is also 5.5% better than for the same time a year ago.

The gains were less than a consensus estimate from analysts, but continued to point to a strengthening housing market despite higher prices and mortgage rates, according to Reuters.

The department revised downward its 2016 total to 561,000 new home sales, but it was still the best year since 2007 and a 12% improvement from 2015.

This follows a report from a couple of days earlier showing existing-home sales stepped out to a fast start in 2017, surpassing a recent cyclical high and increasing in January to the fastest pace in almost a decade, according to the National Association of Realtors (NAR).

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, expanded 3.3% to a seasonally adjusted annual rate of 5.69 million in January, better than many analysts were expecting.

The pace is 3.8% higher than a year ago and surpasses November 2016 as the strongest since February 2007. The conjecture is that unseasonably mild winter weather throughout much of the East and South may be getting the spring selling season off to an early start.

Lawrence Yun, NAR chief economist, said January's sales gain signals resilience among consumers even in a rising interest rate environment.

"Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home," he said. "Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions."

The median existing-home price for all housing types in January was $228,900, up 7.1% from a year earlier while the hike marks the 59th consecutive month of year-over-year gains.

Single-family home sales, the largest share of the market, grew 2.6% to a seasonally adjusted annual rate of 5.04 million in January, 3.7 percent above the pace a year ago.

Consumer Sentiment Remains Near Decade High

Meantime, a separate report released Friday shows that consumer sentiment edged upward in late February, just below the decade peak recorded in January, according to the University of Michigan’s Survey of Consumers.

The Index of Consumer Sentiment improved 5% from the same time a year ago with near-similar gains in its measures of consumers’ feelings about current economic conditions and their expectations. In contrast, results compared to January were lower to little changed.

“Overall, the Sentiment Index has been higher during the past three months than any time since March 2004,” said Surveys of Consumers Chief Economist Richard Curtin. “Normally, the implication would be that consumers expected Trump's election to have a positive economic impact. That is not the case since the gain represents the result of an unprecedented partisan divergence, with Democrats expecting recession and Republicans expecting robust growth.”

He said that while the expectations of Democrats and Republicans largely offset each other, the overall gain in the Expectations Index was due to self-identified Independents, who were much closer to the optimism of the Republicans than the pessimism of the Democrats.

“Since neither recession nor robust growth is expected in 2017, both extremes must eventually converge,” Curtin said. “Although the data indicate a growth rate of 2.7% in consumption during 2017, the data also indicate we can expect greater volatility and discretionary spending differences across subgroups.”

Interest Rates May Soon Rise Again

This follows earlier in the week the U.S. Federal Reserve’s policymaking arm releasing minutes of its most recent meeting from a little more than three weeks ago showing another hike in interest rates could come soon.

Many participants of the Federal Open Market Committee noted that a further increase in the federal funds rate would be appropriate “fairly soon” if the incoming data met or exceeded their expectations, according to RBC Economics Research.

“That comes as no surprise given recent comments from Fed speakers,” said Josh Nye, RBC economist. “Some participants thought it might be appropriate to raise rates as soon as the upcoming meeting in March, seeing an opportunity to increase the committee’s flexibility to respond to any unexpected firming in economic conditions, although that view did not appear to be widespread.”

The next three weeks will be very important, according to Lindsey Piegza, chief economist at Stifel Fixed Income. That’s because it’s possible economic data between now and when the FOMC meet again in mid-March could swing highly positive, showing an increased need for another rate increase.

“The more cautious voices of the committee are those voting this year, suggesting patience will likely trump the need for preemptive action,” she said. “After all, with little fear of inflation or growth running hot, many on the committee would rather have additional clarity in terms of fiscal policy before taking additional action.”

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