March 19, 2021

February’s harsh winter weather seems to have taken a toll on home construction and retail sales activity last month. The manufacturing outlook hit its highest level since 1973, which bodes well for the economy in coming months. And mortgage rates continue to press higher.

Home building hit a bump in the road in February

• February housing starts fell 10.3% from January and 9.3% from February 2020, to 1.421 million (SAAR).
• Building permits fell 10.8% from January, to 1.682 million (SAAR), but were up 17% from a year ago.

Mortgage rates continue to press higher

• Rates now sit at their highest level in a year.
• Surprisingly, a key decision late this week by the Federal Reserve has thus far had minimal effect on rate movements.

Signs are growing that the economy is ready to boom

• Retail sales fell 3.0% in February from January, but the report was likely skewed by February’s harsh winter weather. January’s monthly growth from December was revised up to 7.6%.
• The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook spiked to 51.8 in February, the highest reading in nearly 50 years.

So what? 

February’s monthly decline in permits (the largest one-month decline since April) and the downshift in starts can likely be attributed at least in part to severe winter weather experienced across much of the country — permits fell strongly in the South, and starts were down roughly a third in the Midwest. Relentless increases in lumber prices are also likely eating into activity — by some measures, lumber prices have surged almost 59% over the past year, more than any 12-month period since 1947. Even so, there remains plenty to be optimistic about in the home construction industry. Despite the monthly declines, both permits and starts are still near their highest levels in more than a decade. And the annual regression in starts masks the fact that the reading from February 2020 — just before the pandemic struck the U.S. in earnest — was so strong. With the supply of existing homes at all-time lows, builders will continue to have a key role to play in addressing the inventory shortage for a market chock full of eager home shoppers.

Mortgage rates — and the bond yields that dictate them – kept rising this week, even as the Federal Reserve held firm on its message that it has no plans to raise benchmark interest rates or slow its program of bond purchases. With the economy showing signs of improvement, the Fed finds itself in the unenviable position of having to delicately cultivate a message that expresses ongoing support for markets while also affirming that it will tap the brakes when appropriate. Either way, upward pressure on mortgage rates is likely to remain, as increased economic activity and steeper inflation both tend to push rates higher. Meanwhile, a separate development from the Federal Reserve had surprisingly little effect on mortgage rates, at least for now. The central bank announced Friday that, beginning April 1st, it would no longer allow banks to exclude Treasuries from a key measure of their leverage – that is, how much capital they have relative to their total assets. The decision threatened to weaken demand for Treasuries, which would place more upward pressure on mortgage rates, but so far, the movements have been minimal. The move was also highly anticipated, so it’s likely that the Fed’s decision has been “priced in” by investors for several weeks.

The main force continuing to drive mortgage rates upward is the overarching sense that the economy is improving and primed for strong growth in the coming year. Millions of COVID-19 vaccines are being administered nationwide every day, and evidence of an improving economy continues to show up in key economic data releases. February’s one-month decline in retail sales figures was masked by an upward revision to an already-strong report from January, and likely influenced by harsh winter weather experienced through much of the country in February. The 3-month average annualized growth in retail sales is 7.2%, suggesting that the retail sector is off to a solid start to 2021. March’s reading of the Philadelphia Federal Reserve’s manufacturing business activity index was the strongest monthly measure since 1973, and key sub-indices covering hiring, new orders placed and shipments all registered meaningful gains on the month. Taken together, the reports signal that demand for goods is growing and that while COVID-driven constraints remain, the economy appears primed for significant growth in the months to come.

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