KEY DATA: Sales: -6.1%; Year-over-Year: +2.1%; Median Prices (Year-over-Year): +5.0%
IN A NUTSHELL: “The housing market may still be improving, but it is doing so with two steps forward and one back.”
WHAT IT MEANS: Is the housing market improving or softening? If you look at the data, the answer is yes. After two consecutive nice increases in existing home sales, the market went backward in November. The sales pace fell to its lowest rate since May. That is not to say the increase has been steady. It was hardly that. Sales rose in June and July, fell in August and then rose once again in September and October. Hence, the two-steps forward, one-step backward comment. In November, the declines were in every region. The largest drops were in the Midwest and West and if anyone knows why sales were off in those areas by about 9%, which is really large, please tell me. It was not as if the weather was terrible. In other words, I just don’t get it. As for prices, they have held in there quite nicely. After bottoming in June, the year-over-year change in the median price has slowly increased. That may be due to the sluggish increases in inventories.
MARKETS AND FED POLICY IMPLICATIONS: It is hard to explain the sharp drop in home demand. The weather in November was nothing exceptional and mortgage rates were not that far above the fifty year lows. One explanation is that the supply of homes for sale is relatively limited – and it is – and so buyers are having a difficult time finding suitable options. That makes sense and a limited supply may restrain home sales for a long time to come, especially when rates rise. In the future, homeowners will have to decide that a different home at a higher mortgage rate is worth it. Some may not feel that is the case, especially since the recent extraordinarily low rates will look awfully good compared to more normal mortgage levels. That said, movers are not facing higher mortgage rates now, so the explanation for near-term supply weakness may be the lack of equity. If people don’t have enough equity to pull out of their current homes, they may not have the ability to make a move. That would limit the number of homes for sale and thus sales themselves. The implication is that the pathway back to a more normal housing market, where what I call the churn or housing turnover helps drive sales, is a long and winding one. What will investors make of this report? Well, since any indicator that points to the Fed being “patient”, i.e., that only reinforce the view that the Fed will not tighten anytime soon, can only add to the strength in equity prices we have seen since the FOMC meeting. Low rates are the markets drug of choice and as long as people believe the Fed will keep mainlining that drug, they will remain euphoric.
KEY DATA: Sales: +2.4%; 1-Family: +2%; Condos: +5.2%; Median Prices (Year-over-Year): +5.6%
IN A NUTSHELL: The housing market continues to improve though without much exuberance.”
WHAT IT MEANS: Housing is one of the more enigmatic parts of the economy. It led the way as construction, sales and prices soared, but then the sector seemed to stall. The brutal winter didn’t help and the abandonment by investors just added insult to injury. Well, the upturn continues, but not robustly. New home sales increased nicely in September despite a sharp drop in demand in the Midwest. It is not clear why that one region didn’t follow form, but these numbers do bounce around a lot. Condos were the hot item but interest in single-family dwellings was also up. Investor demand seems to have stabilized, which is a good sign for the market. The level of sales was the strongest since last September. While it did not match the pace reached during the June through September 2013 period, it is up nearly 13% from the winter bottom. As for prices, they were up solidly, but the days of large price increases are behind us. The supply of homes, as measured by the number of months it would take to clear the market at the going sales pace, eased in September but is still up from the year before. Regardless, supply and demand seem to be reasonably well balanced.
MARKETS AND FED POLICY IMPLICATIONS: It looks like housing added solidly to growth in the third quarter, but we will not know until we get the GDP report on October 30th. It has been a long process but the market is closing in on a sustainable sales pace. Prices continue to rise, but the heat is largely gone. That should not be a shock as costs are within ten percent of the highs posted in 2005 and 2006. Basically, the existing portion of the residential housing market is largely healed. Now if we can only get the new home segment to get going, everything would be back to normal. It will be quite a while, though, before builders are selling their product at a more reasonable pace. With fears easing, investors may start looking at economic fundamentals once again and since this report was better than expected, it should help keep the rebound going. But it is not so strong that the Fed will actually start thinking the economy is in good shape. Of course, there are some members who will not say it is strong until it has been strong for “an extended period”, but that is the way some central bankers think. Regardless, I will take this report and move on as it supports the view that the economy continues on its upward path despite the craziness going on in the U.S. and around the world.
KEY DATA: Sales: down 1.8%; Prices (Year-over-Year): up 4.5%
IN A NUTSHELL: “The rotation from investor to homeowner continues and that is keeping a lid on housing sales and prices.”
WHAT IT MEANS: When no one else would buy a house, investors saw an opportunity and they came in by waves. That started the housing rebound and led to solid increases in prices. Now that costs are rising back toward levels that might have existed if we didn’t have the surge and bust, investor opportunities are shrinking and so is their share of the market. The result: Existing home sales seem to have hit a plateau. They fell in August and are down fairly sharply from the August 2013 pace. But the weakness was hardly spread across the nation. The West and South saw declines but there were almost equal increases in the Northeast and Midwest. Over the year, sales in the West are down almost 10%, an indication that investors are pulling back sharply as this area was a prime spot for activity in the past. As for prices, they are still up over the year and it looks like the deceleration has stopped. The number of homes for sale, while down in August, has been on a modest upward trend. Still, it is not that much higher than existed during the early 2000s, before the irrational exuberance really hit. Indeed, price increases and inventories seem to be reasonably well in line with historical patterns.
MARKETS AND FED POLICY IMPLICATIONS: The housing market is in transition from investor-driven to owner-occupied. As is usually the case with transitions, you get some dislocations and that is happening. But the sales pace has flattened over the past few months, not fallen, and that is good news. First time buyers are still in the game and rates remain at very low levels, so the outlook is good for the market. Just don’t expect any surge in sales, which also is something positive. We hardly want another bubble. Housing should be a positive for the economy this quarter but maybe not a huge one. Of course, with Janet Yellen hung up over “extended period”, this type of report can only add to her obsession. Why do anything to cause rates to rise when housing is not surging, especially since it is the key interest sensitive sector in the economy? And with Charles Plosser retiring this spring, a major hawk will be leaving the group of bank presidents. It will be interesting to see who replaces him.
KEY DATA: Home Sales: +2.4%/ Leading Indicators: up 0.9%; Claims: 298,000 (down 14,000)
IN A NUTSHELL: “It looks like the economy is approaching escape velocity.”
WHAT IT MEANS: There were a lot of numbers released today and they all were really good. First, there was existing home sales, which rose solidly in July. The pace of demand is back to October after having posted four consecutive increases. While the level is not spectacular, it is probably within ten percent of a solid market. The huge levels posted during the mid-2000s should be viewed as aberrations not targets. Increases were in all regions except the Northeast, which was flat. As for prices, they continue to moderate. After peaking last August at a 13.4% rise over the year, the gain is now under 5%.
Looking forward, the Conference Board’s Index of Leading Indicators popped in July. This measure is accelerating as there were 0.6% increases in both May and June. Gains in both the coincident (current conditions) and lagging indicators support the view that the economy is in really good shape. And then there were the weekly jobless claims number, which got back to “normal”, that is, below 300,000. Last week’s pop was a surprise and assumed to be due to a non-seasonally adjustable pattern of vehicle production shutdowns. That we moved back to such a low rate is an indication that the labor market is really in good shape.
There were two other reports released that also point to a strengthening economy. The Philadelphia Fed’s Business index surged in August, as did expectations. Supporting the view that manufacturing is really cooking was the Markit flash August number which jumped to its highest level in 4.5 years. The report noted that “robust manufacturing growth momentum has been sustained through the third quarter”.
MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen speaks tomorrow morning and that is the focus of attention. Her talk takes on even more importance given the growing indications that the economy is beginning to break out of its sluggish growth mode. While waiting for wage gains is not exactly the equivalent of sitting on a bench waiting for Godot, it is not really the best way to run monetary policy. Wages is a lagging, lagging indicator and monetary policy needs to look forward. The economic data are pointing to stronger growth than the Fed has been forecasting, which is hardly a surprise. I always use the Fed’s numbers as a lower bound for growth. Of course, I have been aggressively optimistic this year and seeing the possibility that my forecast could actually turn out to be correct makes me a bit giddy, so I will limit my criticism of the Fed. That said, I have argued that wage gains are coming sooner than later and that the Fed will be compelled to raise rates earlier than many have expected. Today’s data reinforces that view. These data should make investors happy, but only when they realize that it’s the economy not the Fed that should be driving prices.