Existing Home Sales Fall at the Start of the Year, Jefferson Highlights Consumers’ Struggles, and a Rollback of Regulation

This morning, existing home sales fell 4.9% in January from 4.29m to a 4.08m unit pace, a three-month low. Year-over-year, existing home sales rose 2.0% at the start of 2025, down from the 9.7% annual increase in December.

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Due to a fall in sales, the months’ supply of existing homes rose from 3.2 months to 3.5 months, averaging 3.5 months over the past three months. Typically, a four to seven-month supply is viewed as a healthy balance between demand and supply.

Additionally, from a price standpoint, the median cost of a previously owned home rose 4.8% in January from a year earlier to $397k, albeit marking the lowest price in ten months.

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Bottom Line: While the latest dip in new construction activity at the start of the year with starts off 9.8% was largely a reflection of unfavorable weather and other environmental-related traumas, the latest pullback in sales activity likely reflects a reversal in mortgage rates. After a bit of reprieve in the third quarter of last year amid the Fed’s initiation of policy easing pushing rates to a two-year low, borrowing costs have since largely reversed course, rising 80bps from a September 20th low of 6.13% to nearly 7% as of late.?

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Housing transactions continue, of course,?yet the pace of activity has slowed materially; just as the weight of higher prices have undermined momentum on everyday purchases, higher borrowing costs have driven down affordability to near record lows, exacerbating the “lockout” effect and complicating consumers’ ability to purchase larger ticket items such as a home.?

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Earlier this week on Wednesday, Vice Chair Philip Jefferson spoke at Vassar College in New York, highlighting both the resilience and pain felt by the average American. Noting some?households have benefited from greater wealth, others are "stretched" and have fewer savings than they had before the pandemic. Nevertheless, given a relatively strong economy and a solid labor market, from a policy standpoint, Jefferson concluded that officials “can take our time to assess the incoming data to make any further adjustments to our policy rate.” In other words, there are some signs of consumer strain, but given the uncertainty and unknowns for the broader economy and inflation, the Committee is likely to err on the side of caution, extending its position on the sidelines for some time.?

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Also, this morning, the S&P Global U.S. Manufacturing PMI rose 0.4 points from 51.2 to 51.6 in the preliminary February print, slightly more than the expected increase to 51.4 and the second consecutive month of expansion. At 51.6, this marks an eight-month high.

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The Services PMI, on the other hand, unexpectedly declined 3.2 points from 52.9 to 49.7, marking the first reading in contractionary territory (below 50) in two years. According to the median forecast, the index was expected to rise to 53.0 in the preliminary February print.

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Taken together, the Composite PMI also unexpectedly fell 2.3 points from 52.7 to 50.4, the lowest reading since September 2023.

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Additionally, this morning, consumer sentiment was unexpectedly revised lower in February as inflation expectations rose as a result of ongoing tariff threats. The University of Michigan Consumer Sentiment Index fell from 67.8 to 64.7 in the final February print, a 15-month low. According to the median forecast, the index was expected to be unrevised at a reading of 67.8 in the final February print.

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In the details of the report, a gauge of current conditions was revised down three points to a reading of 65.7, a three-month low, and a gauge of future expectations was revised down 3.3 points to a reading of 64.0, the lowest reading since November 2023. Meanwhile, consumers’ inflation expectations over the next year was unrevised at 4.3%, marking a 100bp increase from January.

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Yesterday, on the economic calendar, the latest read on jobless claims showed initial jobless claims rose 5k to 219k in the week ending February 15, slightly more than the expected increase to 215k and marking a two-week high. The four-week average, however, fell slightly from 216k to 215k. Continuing claims, or the total number of Americans claiming ongoing unemployment, meanwhile, increased by 24k from 1.85M to 1.87M in the week ending February 8, the highest in two weeks.

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Also, yesterday, the Philly Fed Business Outlook Index fell from 44.3 to 18.1 in February, less than the expected decline to a reading of 14.3, albeit marking a two-month low.

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In the details of the report, new orders dropped from 42.9 to 21.9, shipments declined from 41.0 to 26.3, and the six-month outlook decreased to 27.8 from 46.3 in February, a five-month low. On the other hand, delivery time rose from 6.8 to 12.4 in February, the highest reading in six months and prices paid increased from 31.9 to 40.5 in February, the highest reading since October 2022.

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Finally, yesterday, the Leading Index fell 0.3% at the start of the year, surpassing the 0.1% decline expected and following an upwardly revised 0.1% gain in December (revised up from -0.1% initially reported). At -0.3%, this marks the largest monthly decrease since October.

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On the fiscal side of things, aside from weeding out waste and inefficiencies, the Trump administration has also set its sights on reining in “government overreach” by reducing regulatory barriers and restrictions that exceed the government’s scope of power. According to the President’s Executive Order issued on Wednesday,?all “Agency heads shall, in coordination with their DOGE Team Leads and the Director of the Office of Management and Budget, initiate a process to review all regulations subject to their sole or joint jurisdiction for consistency with law and Administration policy.” Within 60 days, agency heads are requested to identify regulations or restrictions exceeding “the scope of power vested in the federal government by the Constitution, including those based on unlawful delegations of executive power or based on anything other than the best reading of the underlying statutory authority or prohibition.”

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According to estimates from inside the White House, the cost of unnecessary and overly burdensome regulation amounts to?nearly $1.7 trillion. Other analysis, meanwhile, suggest while the cost is sizable, it may be?materially less than the administration’s figure.

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Following this week’s relatively lighter schedule of releases, the economic calendar is quite robust next week beginning on Monday with a look at the Chicago Fed National Activity Index, along with the Dallas Fed National Activity Index.

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On Tuesday, more housing data with the FHFA House Price Index, and the S&P CaseShiller 20-city and national price indices, along with the February Conference Board’s Consumer Confidence Index.

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Last month, consumer confidence dropped just over five points to a reading of 104.1 in January, the lowest level in four months. This month, confidence is expected to decline again, potentially falling to 103.5, and marking a five-month low.

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Also on Tuesday, well take a look at the regional Richmond Fed Index.

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Turning to Wednesday, we begin with weekly mortgage applications, followed by the final read of January building permits, and January new home sales.

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On Thursday, we turn to weekly jobless claims, and the first highlight of the week – the second-round Q4 GDP report.

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In the preliminary report, GDP rose 2.3% in the fourth quarter, less than the 2.6% gain expected and marking the slowest pace of growth in three quarters. In the second-round Q4 report, GDP is expected be unrevised at 2.3%.

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Also on Thursday, the January durable goods order report will be released. After unexpectedly dropping 2.2% in December, durable goods orders are expected to rise 1.2% in January, potentially marking the largest gain in six months. Over the past 12 months, durables are expected to move back into the black, up 0.1% following two consecutive months of decline.

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Also on Thursday, well take a look at pending home sales, and the February Kansas City Fed Manufacturing Index

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We’ll wrap up the week, on Friday with another key report - looking at January personal income and consumption, along with the latest read on the PCE – the Fed’s preferred inflation gauge.

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Personal consumption is expected to rise 0.3% in January and 5.9% on an annual basis, a potential uptick from the 5.7% annual gain in December, and still within the average established since June 2023. Income, meanwhile, is expected to rise 0.3% in January and 4.2% year-over-year, down from the 5.3% annual gain in December, although still perpetuating an average pace of over 4% since the start of 2024.?

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On the inflation front, the PCE is expected to rise 0.3% in January, matching the increase the month prior, and 2.5% on an annual basis, potentially marking a one-tenth of a percentage point decline from the pace reported in December. Stripping out food and energy, the core PCE is expected to rise 0.3% in January, a potential uptick from a more muted 0.2% gain the month prior, and 2.6% year-over-year, potentially marking a two-tenths of a percentage point decline from the pace reported in December and the smallest annual gain since June. A welcome step in the right direction following a disappointing headline rise in both the January read of the CPI and the PPI.

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Also on Friday, the February Chicago PMI Index will be released.

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Finally, on the Fed-speak front, we will hear from a few officials throughout the week including Atlanta Fed President Raphael Bostic, Cleveland’s Hammack, and Chicago Fed President Austan Goolsbee. Investors will be listening closely for any commentary regarding the Fed’s decision to hold rates steady in January amid accelerating inflation and the upside risk of tariffs juxtaposed with the recent weakness in consumer spending and confidence – and what this all means for the Fed’s next policy announcement now just about three weeks away.?

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-Lindsey Piegza, Ph.D., Chief Economist