Total housing starts were better than expected in December, up 1.4% to an annual pace of 1,702,000. The strength was driven by an acceleration in multi-family starts. Single-family starts declined 2.3% while multi-family starts increased 10.6%, month-over-month. On a year-over-year basis total housing starts were up 2.5% in December. Permits were also greater than expected in December, up 9.1%. The backlog of permits for homes remains elevated, but we believe labor and materials supply constraints continue to hold back the pace of new starts. Existing home sales were softer than expected in December, down 4.6%, to 6.18 million units. On a year-over-year basis, existing home sales were down 7.1%. Inventory of US existing homes declined to the lowest level on record in December. The National Association of Home Builders’ housing market index eased slightly this month but remains well above its 5-year average, suggesting that home builder optimism remains strong. Overall, we believe strong housing demand coupled with low inventory should remain supportive of housing prices this year. We also believe wage gains and an improving labor market should be favorable tailwinds for housing, but we anticipate that further upside to home prices may be constrained by lack of affordability, particularly if mortgage rates continue to rise. According to Bankrate.com, the average rate for a 30-year fixed mortgage is now 3.67% up from 3.20% one month ago.
We have seen a relatively swift move upward in US Treasury yields across the curve so far this year and meaningful pullback in US equities. The 2-year Treasury yield has increased 27 basis points year-to-date to 1.01%, and the 10-year Treasury yield has increased nearly 25 basis points to 1.76% (at the time of this report). Meanwhile, the S&P 500 and the Nasdaq Composite indices are down roughly 6.8% and 10.6% year-to-date, respectively. We believe a number of factors have contributed to higher financial market volatility, including expectations for less accommodative monetary policy, concerns about inflation in the US and abroad, and rising geopolitical tension. Long-term sovereign bond yields in Europe and Japan have also recently increased. Notably, the German 10-year sovereign bond yield temporarily turned positive for the first time since May 2019 this week. We anticipate that financial market volatility will remain elevated over the near-term.
The Federal Open Market Committee is scheduled to meet next week. We anticipate that the Fed’s tone will remain generally hawkish, however, we do not believe monetary policy is on a pre-set course and we expect the Fed will remain data dependent. Based on current fed funds futures prices, the market-implied probability of three to four 25-basis point rate hikes this year is high.
Next Week:
Chicago Fed National Activity Index, Case-Shiller Home Price Index, FHFA House Price Index, Consumer Confidence, New Home Sales, FOMC Announcement, Durable Goods, GDP, Pending Home Sales, Personal Income & Outlays, Consumer Sentiment
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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates. S&P 500– The S&P 500 is a market value weighted index of 500 large-capitalization stocks. The 500 companies included in the index capture approximately 80% of available US market capitalization.