In a contrasting narrative, U.S. consumer sentiment has surged to a 2-1/2-year high in January, signaling a positive shift in outlook amid optimism about inflation and household incomes. However, the housing market experiences a setback with existing home sales falling to the lowest level in nearly 13-1/2 years.
The University of Michigan’s recent report indicates a notable improvement in consumer sentiment, reaching its highest level since July 2021. The January reading of 78.8 surpassed expectations, reflecting a positive sentiment across various demographics, locations, and political affiliations. This shift suggests growing confidence in the economy’s resilience, alleviating concerns that high inflation had previously cast on President Joe Biden’s popularity.
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Factors Behind the Surge
Analysts attribute the positive sentiment to several factors, including a robust stock market, a healthy labor market, and stable gasoline prices. This marks the second consecutive monthly increase, showcasing a remarkable rebound of nearly 60% from record lows in June 2022. The index now stands just 7% below the historical average since 1978.
Inflation Expectations Ease
One key highlight is the notable decline in consumers’ inflation expectations over the next 12 months, reaching the lowest level in three years. The survey recorded a 2.9% expectation for one-year inflation, down from 3.1% in December. This reduction aligns with the 2.3%-3.0% range observed in the two years preceding the COVID-19 pandemic.
Positive Implications for the Federal Reserve
The easing of inflation expectations is positive news for the Federal Reserve, supporting the views of economists who anticipate interest rate cuts in the first half of the year. Despite the Fed’s policy rate increasing by 525 basis points since March 2022, the resilient economy seems unfazed.
In contrast to the upbeat consumer sentiment, the National Association of Realtors reports a dip in existing home sales in December, marking the lowest level in almost 13-1/2 years. Existing home sales declined by 1.0% to a seasonally adjusted annual rate of 3.78 million units. While this may reflect contracts signed in previous months when mortgage rates were above 7.0%, there are indications that the market could be on the cusp of a turnaround.
Mortgage Rates and Housing Inventory
Mortgage rates have declined, reaching an eight-month low at 6.60%. This drop in rates, coupled with signs of improvement in housing inventory, suggests a potential revival in home sales. Despite existing-home sales dropping 18.7% in 2023 to 4.09 million units, the current housing inventory, at 1.0 million units, is up 4.2% from the previous year.
Tight Supply and Rising Home Prices
With a tight supply of homes on the market, the median existing-home price rose by 4.4% from the previous year to $382,600 in December. While the pace of house price inflation slowed in the fourth quarter, the annual median house price hit a record high of $389,800 in 2023, rising by 0.9%.
Future Outlook
Economists remain cautiously optimistic about the housing market, expecting stronger demand in the first quarter as mortgage rates continue to stay low. However, the persistent challenge of limited supply could maintain upward pressure on home prices. A delicate balance between supply and demand is crucial for sustaining a healthy housing market, with a four-to-seven-month supply considered optimal.
The simultaneous surge in consumer sentiment and a dip in home sales present a nuanced economic landscape. While the optimistic outlook of consumers bodes well for the overall economic trajectory, the real estate sector faces challenges that demand careful navigation. The months ahead will likely unveil how these contrasting dynamics play out in shaping the economic landscape.
