Amid the high mortgage rates of the past couple of years, whatever meager housing market activity still occurred was heavily concentrated in the new home segment. This was a space where builders had some leeway to tweak building specifications toward smaller footage or cheaper finishes and/or to offer potential buyers rate buydowns to make purchases more affordable. The other big reason for the shift towards newly built homes was the fact that high mortgage rates also had the effect of freezing up supply in the existing home market since homeowners who had secured low mortgage rates in 2020 and 2021 have been reluctant to move and lose those favorable terms.
With the onset of the Fed rate cutting cycle in September, inventory in the existing home market has begun to improve ever so slightly, allowing existing home sales to post their first y/y increase in over three years in October. Moreover, pending home sales have also ticked up recently. Relative to August levels, they rose 9.6% cumulatively during September and October; in October, they were 6.6% higher than their year-earlier levels, the first positive annual comparison since November 2021.
By contrast, activity in the new home segment has become choppier of late. New home sales badly missed expectations in October, plunging 17.3% m/m and dropping 9.4% y/y. The pullback in sales lifted inventory to 9.5 months’ worth of sales, the highest since October 2022 (a time when the entire housing market was adjusting to Fed’s aggressive rate hikes). Importantly, a growing share of this inventory is made up of completed homes, suggesting more pressure on homebuilders to manage inventory and, perhaps, a cap on price gains even as mortgage rates retreat.
Consumer spending remains quite strong, and early evidence suggests a robust start to the holiday season. Nominal personal spending increased 0.4% m/m in October, real spending up 0.1% m/m and 3.0% y/y. Nominal personal income posted a solid 0.6% m/m, with wage and salary income up 0.5%. The combination lifted the savings rate to 4.4%, which is not high but decent. As long as employment holds up, so should household consumption.
PCE inflation data came in as expected. The PCE deflator rose 0.2% m/m, with the core PCE deflator up 0.3% m/m, lifting the two respective inflation measures to 2.3% and 2.8% y/y, respectively. We still view the data consistent with a December Fed rate cut since an uptick in the fourth quarter had long been anticipated.
