New home sales came in softer than expected for January, posting at a seasonally adjusted annual rate of 593,000. The Census Bureau numbers were 7.8 percent lower than Decembers revised numbers and 1 percent below January 2017. The median price of a new home contracted in January was $323,000, while the average price of a new home stood at $382,700. There was 6.1 months of supply for new homes in January, a gain of almost a full month compared to this time a year ago.

As interest rates have spike during the past two months, the affordability of homes has been significantly affected. This is particularly the case with new home sales given the higher average prices. The unfortunate reality is that people buy payments not just prices. With new home prices at or near record highs, some softness in sales was bound to occur.

While one month does not a trend make, builders could find some tough sledding unless interest rates cool. Mortgage refinance applications are already getting crushed, and purchase application volume has also softened in recent weeks as the rate on a 30-year fixed rate mortgage approached 4.5 percent.

Just a few weeks ago the Mortgage Bankers Association was forecasting a sharp increase in new home sales for January. Their estimate of 700,000 was not only bad, it was comically bad. The Builder Application Survey (BAS) they were utilizing was obviously not asking buyers what they could really afford to buy.

New home sales volume should continue to grow, but that’s assuming builders are going to build some smaller less expensive homes. Not all builders are prepared to do this, and some builders are going to find it difficult to deal with tighter margins on smaller homes.

The new Fed chair, Jerome Powell, spooked markets again this week hinting that the Federal Reserve will continue along its rate hike schedule. Powell’s remarks this week even opened up the possibility of 4 rate increases this year. That would certainly cause some indigestion for home builders when you consider the Fed is also in the midst of a balance sheet normalization.

The National Association of Realtors reported that pending home sales for January were also weak, falling to their lowest levels seen in 3 years. Both new home sales from Census and pending home sales from NAR are forward looking indicators. As a reminder, Census counts a new home sale at the time of contract signing, not closing.

So far this is playing out roughly as expected, assuming you aren’t looking at the economy with the rose-colored glasses (more like blinders) of a Fed economist. The housing “recovery” is not any different from the economic recovery. Most of the growth during the last 9 years is largely an illusion constructed on a massive pile of new debt and dirt cheap liquidity. Once you understand this, you will better understand why the Fed is so keen on hiking rates into an anemic economy. The Fed is utterly devoid of credibility, and they are trying to salvage what they can as fast as they can without giving away the game entirely.