Consumption and Existing Home Sales Improved in January, but Headwinds for the Economy and Housing Have Since Increased

Key Takeaways:

• Gross domestic product (GDP), adjusted for inflation, increased at a 7.0 percent seasonally adjusted annualized rate (SAAR) in Q4 2021, according to the second estimate from the Bureau of Economic Analysis (BEA), a one-tenth increase from the preliminary figure. The upward revision primarily reflects increases to investment as well as state and local government spending. Personal consumption and exports were revised downward.
• Personal income, adjusted for inflation, fell 0.5 percent in January, the fifth consecutive decline, according to the BEA. Excluding transfer payments, real personal income was down 0.2 percent. The personal saving rate fell 1.8 points to 6.4 percent, the lowest since 2013. Led by a 4.3 percent jump in real goods consumption, real personal consumption rebounded, increasing 1.5 percent after a 1.3 percent fall in December. The PCE price index increased 0.6 percent over the month, an acceleration of one-tenth from December, and 6.1 percent over the year, the highest annual growth rate since 1982. Core PCE increased 0.5 percent in January, matching December’s growth rate, and 5.2 percent annually.
• The Conference Board Consumer Confidence Index fell 0.6 points in February to 110.5, the second consecutive monthly decline. Confidence in the present situation increased 0.6 points to 145.1 while consumer expectations for the future fell 1.3 points to 87.5. According to the press release, “concerns about inflation rose again in February,” though “consumers remain relatively confident about short-term growth prospects.”
• Existing home sales rose 6.7 percent to a SAAR of 6.5 million in January, according to the National Association of REALTORS®. Notably, however, revisions to historical data show that the prior three months had modestly weaker sales than previously reported, which is partially offset by upward revisions to earlier months. The number of existing homes available on the market declined 2.3 percent to 860,000, a new series low. The months’ supply was down one-tenth to 1.6, also a record low. The median sales price was up 15.9 percent compared to a year ago, an acceleration of eight-tenths from December.
• New single-family home sales declined 4.5 percent to a SAAR of 801,000 in January, though December’s figure was revised upward by 3.5 percent to a SAAR of 839,000, according to the Census Bureau. New homes sold but not started surged 30.2 percent to a SAAR of 237,000, the highest number since May 2021, while homes sold that are under construction and completed fell 13.6 percent and 15.2 percent, respectively. The months’ supply of homes for sale rose five-tenths to 6.1, though this was driven almost entirely by a 10.4 percent increase in homes for sale but not started.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, fell 5.7 percent to 109.5 in January, the lowest level since April 2021.
• The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, increased 17.6 percent from a year ago in December, the same rate as in November. For the quarter, prices were up 17.6 percent compared to 2020 Q4, a deceleration of 1 percentage point from the third quarter.

Forecast Impact:

Real personal income declined again as the expanded child tax credit expired and wages failed to keep pace with inflation. Still, real consumption increased faster than expected and will likely lead to a near-term increase to our forecast. However, the makeup of the increase, which was due entirely to a jump in goods consumption after a weak December, makes us suspicious that an unusual seasonal adjustment accounted for at least part of the month-over-month increase, so the upgrade may be smaller than otherwise implied by January’s reading. Still, improvements in the auto industry, which we expect to continue throughout the year, helped contribute to the increase in goods consumption, and it’s possible that the Omicron variant weighed on services consumption somewhat in January. The inflation readings were modestly above our expectations, which help explain in part the decrease in consumer confidence despite apparently robust spending, and will likely lead to a small increase to our PCE inflation forecast. Further, we expect energy costs to run even hotter in the near-term as geopolitical events unfold, which will likely drive headline inflation readings even higher.

Existing home sales were above our expectations and will lead to an upward revision to our near-term forecast. Though historical revisions point to somewhat weaker home sales at the end of 2021 than previously thought, we continue to believe some of this robust home-buying activity is a pulling forward of demand in anticipation of higher interest rates in the future. Therefore, our near-term upward revision may be at least partially offset by a downgrade to our existing sales forecast later in the year, especially as January’s pending sales showed signs of pullback amid higher rates and limited inventory. On new home sales, January’s report was modestly weaker than expected and will likely lead to a small downgrade to our near-term forecast, though the January figure may have been held back in part by the Omicron wave and unseasonably cold weather over the month. We continue to expect new home sales to have a strong year even in light of rising mortgage rates as builders continue working through their current construction backlogs and a historically tight supply of existing homes available for sale supports demand for new construction. However, changing monetary and fiscal policy, as well as recent geopolitical events, pose a larger-than-usual risk to both our interest rate and housing activity forecasts. These developments will likely shape our outlooks going forward.

Nathaniel Drake
Economic and Strategic Research Group
February 25, 2022

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