Prices Heat Up… And So Do Sales

Home prices appear to have caught a second wind. Through the second half of 2014, the rate of price appreciation was slowing in many metropolitan markets. Lately, though, the rate has picked up pace.

The S&P/Case-Shiller Home Price Index posted another month of uplifting prices. Specifically, Case-Shiller's 20-city index rose a strong 0.9% in February, posting its best monthly performance since late 2013. February's strong showing lifts the year-over-year rate to 5%. More impressive, the index wasn't lead by a few outliers.

To be sure, San Francisco and Denver lead the way with 3.3% and 2.2% price increases, respectively, but none of the 20 cities in Case-Shiller showed a monthly decline. Given the dearth of existing-home inventory, no one should be terribly surprised that home prices are on the upswing.

Today, housing appears to be the key economic driver. Residential investment increased at a 1.3% annual rate in the first quarter of 2015. This is despite the lousy weather, which took a bite out of overall economic growth. New revised numbers on first-quarter gross domestic product (GDP) show the economy grew a mere 0.2% in the first quarter – a full two percentage points less than the fourth quarter of 2014.

But it's not just investment driving housing forward. Sales on the retail end have picked-up pace. The Pending Home Sales Index was up a third-straight month in March. Month over month, the index was up a stout 1.1%. Sales of existing homes appear to have finally established an uptrend. Strength in existing home sales will hopefully portend strength in new home sales, which have been weak the past couple months. 

Given the weakness in the GDP numbers, the Federal Reserve is less likely to move to raise the federal funds rates. In the latest meeting of Fed officials, economic weakness was the overarching theme. The minutes of the meeting were peppered with words like “moderated” and “slowed.” That said, Fed officials stopped short of scotching any possibility of a rate hike in June.

If we were forced to place a bet, though, we'd bet against the Fed raising the fed funds rate in June. In fact, we've stated in the past that we wouldn't be surprised if the Fed didn't move to raise rates this year. The Fed continues to hang its hat on low inflation and further improvement in the labor market (even though the official unemployment rate is down to 5.5%).

In short, we remain in the low-interest-rate camp, but it's worth remembering that the Fed isn't omnipotent. It can influence interest rates; it can't dictate them. Therefore, it's dangerous to take the current low-rate environment for granted. Things can change, and they can change in a hurry.

Information provided by Jessica Regan.

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