Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

Sales of previously owned homes rose 3.1% last month, but they remained 1.7% lower than a year ago. There were a couple of reasons sales rose after declining in 8 of the past 10 months:

After reaching a 23-year high at the end of October, mortgage rates fell over 1% in the final two months of 2023.

The median price for existing homes fell for the seventh straight month to $379,100. The inventory of homes for sale was 3.1% higher than January 2023. Lower mortgage rates and declining prices create more demand. When you add more supply, sales go up.

While this data is music to the real estate market’s ears, it may be short-lived. The homes sold in January most likely went into contract when rates were plunging in November and December. Mortgage rates have ticked upward to start 2024, as many economic indicators such as hiring have come in much higher than expected. We also got higher-than-expected data on inflation for January, which has led the Fed to warn markets not to expect rate cuts any time soon.

That said, we can still enjoy the rebound in activity in January after existing homes fell to their lowest level since 1995 last year. The uptick in supply should keep prices in check until rates start declining again. I expect that decline to start in the coming months, especially after such a weak report on January retail sales. Speaking of rates…

Mortgage Rates Decline for Third Straight Week 

The average 30-year conforming mortgage rate rose to 6.90% this week, up from 6.77% the prior week. Rates were falling sharply at the end of 2023 but have drifted higher since. Here are the culprits:

- The consumer price index rose more than expected in January.
- Employment rose by 353,000 in January, when the forecast was for a 185,000 increase.
- GDP rose at a 3.3% annual rate in 4Q23, well above the 2% economists were expecting.

All this good news was tempered a bit by the bad news about retail sales, but not enough to keep rates from rising. Since consumer spending is 70% of GDP, more bad news on retail b  sales—which is very likely to happen—will bring rates lower in the coming months.

Food Accounts for the Highest Percentage of Consumer Spending Since 1991

According to the latest data from the USDA, consumers are spending 11.3% of their disposable income on food, the highest level in over 30 years. Eating out has become increasingly expensive, with prices at restaurants up 5.1% over the past year. Prices at the supermarket are still rising, increasing 0.4% just last month.

Despite the dramatic reduction in overall inflation over the past year, consumers are still paying sky high prices for food and housing—aka their biggest needs. This is why some measures of consumer confidence show a pessimistic country, even as the U.S. economy outperforms expectations.