October New Home Sales and Revised Third Quarter GDP

KEY DATA: Sales: -8.9%; Over-Year: -12.0%; Prices (Over-Year): -3.1%/GDP: +3.5% (Unchanged);

IN A NUTSHELL: “The housing fade continues.”

WHAT IT MEANS: The housing market, a key component of the economy, is continuing to deteriorate. New home sales dropped sharply in October with every region posting a decline. The level is the lowest since March 2016. There were double-digit decreases in the Northeast and Midwest, while the South posted a nearly 8% fall off. The West nearly held its own, but it was still down over 3%. In comparison to October 2017, only in the West did sales hold up, with the other three regions posting double-digit declines. With sales slowing, pricing power has disappeared. Over the year, the median home price fell for the second consecutive month.

The second reading of GDP showed no change in the initial estimate of the overall growth pace. There was a downward revision to consumer spending, though it remained quite strong. Business investment, while revised upward a little, remained disappointing. The surge in business inventories added over two percentage points to growth and that is not likely to be matched this quarter.

MARKETS AND FED POLICY IMPLICATIONS: Home sales are faltering and that trend is likely to continue. The National Association of Home Builders’ Housing Market Index cratered in November, dropping a huge eight points. Traffic was down sharply and if people are not looking, they are not buying. To blame rates for the slowdown makes little to no sense, given that mortgage rates are still relatively low. The 30-year mortgage rate is still over one percentage points below the levels buyers faced during most of the housing boom in the 2000s. Remember, affordability has a number of components, including rates, prices and income. Prices did surge and that should be more of the focus of attention. The declining costs of new homes may make units more affordable and I suspect builders are already adjusting to that necessity. As for the economy, it is in good shape. If there are worries, it may be on the business credit side. As the Fed noted in a report on financial stability, debt levels at companies with weak balance sheets pose a growing risk. Also noted was that leverage in the corporate sector is high, asset prices were high and geopolitical and trade risks were growing, any of which could lead to a large drop in asset values. So look at what the government and the private sector are doing, don’t just focus on the Fed.