The Fed is standing aside as house prices rip higher — but here’s what could get in the way


It seems appropriate on a day when the Federal Reserve is making an interest-rate decision to look at the most rate-sensitive sector, housing.

The Case-Shiller house price report released on Tuesday, showing an 11.9% surge for the 20-city composite in the three months ending February, was jaw dropping. Bespoke Investment Group calculates the annualized rise over the last eight months for the national index was 15.3% — a stronger period than even the subprime boom, or in fact any period in the series that dates back to the mid-1980s.

“This level of price appreciation isn’t sustainable long-term, but the combination of demographics, interest rates, and short-term demand shifts brought on by COVID have led to an absolutely terrifying rip higher in prices that even surpasses the subprime bubble’s peak,” said George Pearkes, a Bespoke analyst. Even in Cleveland, which missed out on the 2005 boom, prices climbed 12.5%. The housing website Zillow
Z,
-1.56%

forecasts the March data for the 20-city composite will be even stronger, with prices up 12.7%.

The hottest commodity around is lumber
LB00,
-0.11%
,
with prices on the lead random length contract up 62% this year and 347% over the last 52 weeks.

Logically, the price rises are affecting sales. Bank of America
BAC,
+1.19%
,
JPMorgan Chase
JPM,
+0.46%

and Wells Fargo
WFC,
+2.15%

each reported declining mortgage activity in the first quarter, and the rate of existing home sales in March was down 11% from its October peak.

Low inventory seems to be the key — there is not adequate supply to satiate the interest by urban dwellers to move to spacier surroundings.

For the publicly traded home builders, who have been reticent since the 2008-09 financial crisis to put up more homes, it appears to still be a good backdrop. The SPDR S&P home builders ETF
XHB,
+0.94%

has climbed 32% this year and has more than doubled, up 122%, over the last 52 weeks.

The Fed certainly has shown no signs of wanting to get in the way, focusing instead on a jobs market that is still some 8 million positions short of pre-COVID levels. The central bank is months away from even flagging a reduction in bond purchases, and likely years away from an interest-rate hike.

Ironically, if there is one thing that could disrupt the trend it could be the reopening of the economy. “With remote work giving way to at least partial back-to-office this summer, the housing market is in flux, but we expect overall demand to remain strong, consistent with well-above-trend GDP [gross domestic product] growth for the remainder of this year,” said Robert Dye, chief economist at Comerica Bank.

That view was echoed by Lewis Alexander, U.S. chief economist at Nomura. “It will be interesting to see how housing demand evolves in coming months as more people are vaccinated. Vaccine rollout and economic reopening could prompt more people to move back into metropolitan areas and rent apartments. Alternatively, housing markets might be experiencing more secular changes, leading to a permanent shift in demand towards single-family homes in suburban areas,” he says.

Big tech earnings

Official confirmation the Fed will do nothing comes at 2 p.m. Eastern, followed by the press conference with Chair Jerome Powell at 2:30 p.m.

Google owner Alphabet
GOOGL,
-0.82%

GOOG,
-0.84%

blew away profit estimates alongside announcing a fresh $50 billion stock buyback. Fellow technology giant Microsoft
MSFT,
+0.16%

also beat earnings estimates, but investors reacted a bit negatively to the results. Device maker Apple
AAPL,
-0.24%

and social-media service Facebook
FB,
+0.17%

report their results after the close of trade.

Besides the tech megacaps, payment processing giant Visa
V,
-0.19%

also topped expectations on earnings and revenue. So did social-media service Pinterest
PINS,
+1.11%
,
but investors were wary of the online-pinboard company’s warning that user growth started to slow as coronavirus restrictions eased. That is not yet an issue for microchip maker Advanced Micro Devices
AMD,
-0.23%
,
as it also topped earnings expectations and pointed to a strong current quarter due to surging demand.

Weaker-than-expected results from China weighed on coffee chain Starbucks’
SBUX,
+0.20%

sales, which also was an issue for restaurant owner Yum China
YUMC,
-0.03%
.

Psychedelic drug maker MindMed — which has no revenue — will go public on the Nasdaq on Wednesday.

President Joe Biden will lay out his American Family Plan to a joint session of Congress, which will feature an estimated $1.8 trillion of social spending, to be paid for by $1.5 trillion in taxes, including a hike in capital-gains tax and the imposition of capital-gains tax at death for high earners.

10-year yield on the move

The most interesting move in markets over the last two days has been in the bond market. Up 5 basis points on Tuesday, the yield on the 10-year Treasury
BX:TMUBMUSD10Y
edged up to 1.65%.

U.S. stock futures
ES00,
+0.10%

NQ00,
-0.11%

were languishing, following a day in which the S&P 500
SPX,
-0.02%

inched up to its fresh record high.

Random reads

Former U.K. Prime Minister Tony Blair draws comparisons to Doc Brown in “Back to the Future” with his new look.

It turns out the Spock character in “Star Trek” was bad at logic — describing events that happened as “impossible” 83% of the time.

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