Broker Check

Mosaic Asset Partners- The NEW Normal

June 30, 2023

Happy Fourth of July!

The housing discussion is heating up again as a focal point for many individuals. Home prices, in general, peaked exactly a year ago in June of 2022. Since then, as the Federal Reserve aggressively raised interest rates mortgage rates increased significantly, putting a damper on prices and demand. But as the Fed nears the end of this current cycle, housing demand is picking up slightly while inventory remains constrained.  Home prices began to stabilize over the Spring and have been steadily rising since then. Prices are now just 2.4% below the June 2022 peak according to the Case-Shiller national home price index. The major move in rates last summer which prompted the decline has done little to sway demand today. While consumers may have stepped back for a few months, it appears that there is now acceptance on their part that higher mortgage rates are here for a while. This all leads back to a recurring theme which is inventory. The vast majority of current homeowners have mortgage rates in the 3% range (or lower!), which makes them much less likely to want or need to sell their current home and purchase a new one with higher rates. The recent increase in mortgage demand is being driven by the sales of newly built homes, which is a different strategy than we have seen previously. It is clear that buyers are now seeking options beyond the existing home market and that should drive further activity in the months ahead.

As always, I am looking for the silver lining in this latest batch of headlines. The pickup in housing activity should be viewed in a positive light. In my opinion, this tells us that consumers are settling into a new pattern of sorts and that the inflationary environment is becoming an accepted norm. Unlike last week when the “talking heads” were proclaiming that a recession remains highly likely by year-end, the viewpoints have changed significantly. It seems that any recession we may see is still several quarters away. My how the tides are turning yet again! The ever-present wrinkle, however, will be the Fed’s decision in a few short weeks. Will they continue to hold steady, or will they raise rates further? Fed Chairman Powell has made it clear that their work is not done. The latest PCE Index (Personal Consumption Expenditures) released on Friday morning showed another slight decrease in prices. This is a key metric watched by the Fed and provides further evidence that inflation is gradually coming back under control. Perhaps this additional piece of economic data will provide enough evidence for the Fed to “wait” it out a little longer before resuming rate hikes. As we have said many times before, this is a waiting game and as more year-over-year comparisons are released the picture will become clearer.

What I am encouraged about mostly, however, is that perhaps a positive path forward is now emerging. Think about the housing market turning upward for a moment. Consumers/buyers remain willing to spend and pay higher prices in the face of higher mortgage rates. New construction is the flavor of the month right now given the lackluster existing home inventory market. New construction means more spending on materials and labor, thus in turn fueling the economy. With supply chain issues in the rearview mirror (can you imagine!!??), lag times and costs have come down quite a bit. While we may be paying more for the same goods and services compared to what we paid a few short years ago, this is likely our new normal. I repeat our NEW NORMAL. This is a term we are hearing daily, and it won’t go away anytime soon so buckle up and add it to your vocabulary.

Better recovery in NEW home supply:

As evidenced by this graph, buyers remain on the prowl. Many homebuilders are adding incentives like premium and upgraded finishes, mortgage rate buydowns, and other concessions to combat higher mortgage rates. These sales tactics seem to be working based on the jump in the numbers. I have been thinking about this scenario for a while now and it appears that it is coming to fruition. The housing market issues are likely to only get worse from an inventory standpoint. There simply aren’t enough new or existing homes to fulfill demand and unless rates spike significantly higher from here, this problem will linger for years to come.

So, what do I see today as we crest over the mid-point of the year and move into the second half? I see a way for the Fed to leave the turbulence behind and find a safe cruising altitude. With the A.I. powered technology world pushing automation and efficiencies forward, the workforce is re-engaging on many levels. Consumers have grown more accustomed to change than ever before as evidenced by new and emerging behaviors. The historic areas of growth in our country are being restored in new and meaningful ways. While we still have some road to travel on the ever-congested highways, our final destination might be starting to become a little more clear. At least that’s my take as we head into the holiday weekend.

Have fun and enjoy!

https://www.schwabassetmanagement.com/content/housing-rolling-out-deep?segment=advisor&mkt_tok=MTUzLUhSWS0xOTQAAAGMnNEbpXVkUc-G0mK5Soc9R5f7907hKRIEWdUZczePYgWjfbkS8Bbeb9sHUy0_L2E9kv5g30Sabuze-7yMoswlNWxB3o5-CqixaNSMjEbEg66b

https://www.cnbc.com/2023/06/27/home-prices-rose-for-third-straight-month-in-april-sp-case-shiller.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

https://www.cnbc.com/2023/06/28/mortgage-demand-grows-driven-by-sales-of-new-homes.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

https://www.bea.gov/data/personal-consumption-expenditures-price-index

https://www.cnbc.com/2023/06/29/first-quarter-economic-growth-was-actually-2percent-up-from-1point3percent-first-reported-in-major-gdp-revision.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

https://www.cnbc.com/2023/06/30/pce-inflation-may-2023-.html´╗┐

Christopher E. WassonCFP®

President

 Mosaic Asset Partners, LLC

                 1122 Kenilworth Drive, Suite 310

                 Towson, MD  21204

                 410.821.0089         fax 410.821.5993

                 MosaicAssetPartners.com  

                 

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Mosaic Asset Partners, LLC is not affiliated with Kestra IS or Kestra AS.  Investor Disclosures: https://www.kestrafinancial.com/disclosures

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.