Wait! Stop the Presses!

I have to start by explaining this headline for the younger readers who don’t remember the culture of the newspaper industry, which is now long gone. You see, newspapers in larger markets once printed multiple editions throughout the day, so that news could be as recent as three or four hours old. “Wait! Stop the Presses!” was a popular expression that editors would use when a big story was breaking, and the edition on the printing press needed to be changed immediately to report the breaking news.

Well, we had one of those stop-the-presses stories in mid-April, when Fed Chairman Jay Powell unexpectedly announced that firmer-then-expected inflation during the first quarter has called into question whether the Federal Reserve will be able to lower interest rates this year without signs of an unexpected economic slowdown.

His remarks indicated a clear shift in the Fed’s outlook following a third consecutive month of stronger-than-anticipated inflation readings, which derailed hopes the central bank might be able to deliver pre-emptive rate cuts this summer. Powell went on to say the recent data have clearly not given us greater confidence and instead indicated that it is likely to take longer than expected to achieve that confidence. His remarks were his first public comments since the inflation report was issued, and that sent stocks sliding as investors recalibrated their rate-cut expectations.

Startling Development. This was a startling development and was totally unexpected. In fact, it figuratively stopped the presses, at least the financial ones, as it was one of the biggest developments so far this year. Remember, all of the financial markets, from equities to fixed income to the home mortgage markets, had all predicted multiple quarter-point cuts this year, originally expected to start in March, and then pushed back to June. But now there appears to be no timeline for the beginning of rate reductions, throwing a curve ball at the general economy, and at the housing industry in particular.

Good News. But the good news is that Powell was clear in his comments that the Fed wasn’t considering rate increases either. Instead, he said officials would leave rates at their current level “as long as needed” if inflation proved more stubborn. He also said the Fed would be prepared to cut rates if the economy was slowing sharply; rates were raised rates last summer to a 23-year high and have held them there since July.

The mortgage markets are extremely efficient in their pricing, and it is apparent the industry beat the Fed to the punch. As the mortgage industry monitored inflation since the first of the year and the stubborn pause in inflation reduction has not materialized, mortgage rates have surged past 7% and home sales in March posted their biggest monthly drop in more than a year, renewing pressure on the U.S. housing market. The average rate on the standard 30-year fixed mortgage jumped by nearly a quarter percentage point to 7.1%, the highest level since late 2023 and the largest weekly increase in nearly a year.

While I have previously written that the new home market remains confident, and major builders are in a position to offer mortgage rate “buy-downs” to help move new homes, that kind of financial engineering is not available to the resale market. As a result, existing home sales in March fell 4.3% from February in what was the largest percentage decline on a monthly basis since November 2022.

The housing market’s recent turbulence is cutting short a positive start to the year. Sales tumbled to their lowest level in nearly 30 years in 2023. But they rose during the first two months of this year as a number of buyers took advantage of a decline in mortgage rates to resume their home search. Active listings ticked higher and real-estate showings picked up in January. But then mortgage rates started to rise again in February, weighing on March sales.

For now, we have no visibility on when the Fed may cut rates, which is a big development. All we can do is monitor inflation for a signal on when they might act.

AVP Index. The Index is flat-to-slightly up this month, with a +1.1% increase over the previous month, but +6.9% year-over-year and +14.5% over the last 36 months. The big drivers were the Architectural Billings Index (+7.1%) and a whopping +10.7% for Housing Starts. Overall, the Index indicates construction remains steady, if not strong.

Pierre Villere

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.

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