All Things in Moderation

Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up.

Housing starts rose 15.8% MOM to a seasonally adjusted annual rate of 1.499 million. This was 4.3% below December 2023’s rate. Building permits fell 0.7% MOM to a seasonally adjusted annual rate of 1.483 million units. Both numbers were well above Street expectations.

Homebuilder sentiment improved modestly to kick off the new year, according to the NAHB. “NAHB is forecasting a slight gain for single-family housing starts in 2025, as the market faces offsetting upside and downside risks from an improving regulatory outlook and ongoing elevated interest rates,” said NAHB Chief Economist Robert Dietz. “And while ongoing, but slower easing from the Federal Reserve should help financing for private builders currently squeezed out of some local markets, builders report cancellations are climbing as a direct result of mortgage rates rising back up near 7%.”

Despite the affordability issues, the use of incentives and price cuts has remained steady since last summer. Sentiment remains strongest in the Northeast and Midwest, while the South and (especially) the West are struggling.

Fed Governor Chris Waller said that the Fed Funds futures might be too hawkish if inflation comes in as expected this year. “As long as the data comes in good on inflation or continues on that path, then I can certainly see rate cuts happening sooner than maybe the markets are pricing in,” Waller said during a “Squawk on the Street” interview with Sara Eisen.

Asked how many that could entail, he responded, “That’s all going to be driven by the data. I mean, if we make a lot of progress, you could do more,” which he said could mean three or four, assuming quarter percentage point increments.

“If the data doesn’t cooperate, then you’re going to be back to two and going maybe even one, if we just get a lot of sticky inflation,” he said.

Right now, the “maybe even one” scenario is the baseline according to the Fed Funds futures.

Interesting quote about how homebuyers are adjusting to the new normal: “My average first-time homebuyer now says $3,500 is comfortable, compared to the $2,000 to $2,500 range previously. Those looking for a family house now say $6,500 to $7,500; previously, $4,500 was the primary target. I’m also seeing more people more comfortable with $8,000 to $10,000 mortgage payments than ever. Honestly, for the first 20 years of my career, I don’t believe I ever had a mortgage payment offered over $10,000, and now I have a few of those each quarter.”

Industrial production rebounded smartly in December, according to the Federal Reserve. For the full year, industrial production rose 0.5%. Capacity utilization rose from 77% to 77.6%.

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