Last Week in Review: Three Things to Know This Week
Longer-term U.S. interest rates, including home loan rates, increased sharply this past week, touching pre-COVID levels. Let’s break down the cause and effect as well as some other stories affecting housing.
January Retail Sales Highlight Pent up Consumer Demand
Retail Sales is a monthly report which highlights the health of the U.S. consumer and their willingness and ability to spend. With consumer spending making up nearly 70% of Gross Domestic Product (GDP), it is important to see continued growth in retail sales.
Expectations were for a month-over-month sales growth of 0.8%. Instead, the number came in at 5.3%, five times hotter than expectations. It also represented the third strongest month-over-month reading ever recorded.
This incredibly strong January Retail Sales number tells us economies re-opening and more stimulus will likely lead to an uptick in consumer spending and activity and higher GDP. All of this good news about the future is bad news for bonds, hence a reason for the uptick in rates this week.
New Home Builders Looking for Lumber Relief
The National Association of Home Builders (NAHB) continues to report unprecedented strong demand for homes as many tailwinds exist for new housing such as migration from big cities, work from home, and millennial household formation.
But home builders do have a challenge on their hands: lumber inflation. The cost of lumber is up over 170% in the past ten months, thereby adding thousands of dollars to the cost of a home and making it unaffordable for many. In fact, the NAHB said customers are walking away from contracts on new homes due to the additional lumber expense. Builders are reluctant to start new developments, as they are unwilling to start projects and absorb the added cost. This could be one reason why January Housing Starts, reported on Thursday, were well below expectations. Where is the relief? It could come through lumber tariff relaxation with Canada and a push for U.S. lumber producers to significantly ramp up production to put a dent in the demand.
Inflation, like we are seeing in lumber and other commodities, is bad for rates and another reason for the recent uptick in home loan rates.
Supply Outweighing Demand
The Federal Reserve has committed to purchase “at least” $120B worth of Treasurys ($80B) and mortgage-backed securities ($40B) (MBS) per month in an effort to keep long-term rates, like mortgages relatively low.
The recent problem? The Fed has been on a pace to purchase $30B in MBS each of the last couple of weeks, yet rates ticked UP. This is because nearly $100B in MBS were available for sale, and the Fed only purchased one third available.
So basic economics kicks in. If supply outweighs demand, prices drop and, in the case of bonds, rates tick higher.
Bottom line: There is an old saying in the bond market: “Cure for higher rates, is higher rates.” Meaning, at some point, the uptick in yields makes investing or buying bonds more attractive. We have not hit that point yet.
