KEY DATA: Starts (Over-Month): +3.2%; 1-Family: -4.6%; Year-to-Date: +5.1%; Permits (Over-Month): +5.0%; Year-to-Date: +4.2%
IN A NUTSHELL: “It’s hard to say that home construction is rebounding when the gain was mostly in the volatile multi-family segment.”
WHAT IT MEANS: The data on housing has been mostly negative for months now, so you would think a sharp rise in construction activity would be taken as good news. Well, not so fast. Yes, housing starts jumped in November, but all of the increase was in the wildly volatile multi-family portion. Single-family construction was down sharply and over the year, it was off by double-digits. For the first eleven months of the year, construction is up, but it looks like the pace peaked in the spring. Natural disasters are playing a role in the volatility. Activity surged in the South, which was likely due to make up from the hurricanes. Meanwhile, construction faltered in the West, possibly due to the fires. Look for rebuilding in California to create an artificial rebound in the months ahead. Multi-family construction is taking on a more important role. That likely mirrors the preferences of Millennials, who are renting, and boomers, who are downsizing. Since multi-family construction starts are random and can change dramatically over the month, the monthly changes will likely be even more unpredictable. As for the future, permits continue to run ahead of starts. That usually means construction activity should pick up going forward as builders don’t spend money on permits unless they are pretty certain they will be constructing the unit.
Another indicator, released yesterday, reinforces the belief that the housing market continues to decline. The National Association of Home Builders Housing Market Index tanked once again in December. The level was the lowest since May 2015. Traffic is slowing and while sales expectations are decent, they are way off their highs. Whatever confidence housing developers may have had is disappearing rapidly.
MARKETS AND FED POLICY IMPLICATIONS: The FOMC is starting its two-day meeting today and I still expect a rate hike to be announced tomorrow afternoon. There are a number of reasons why I stick to that belief. The first is that while growth is moderating, it is not faltering. Fourth quarter GDP growth is expected to come in somewhere between 2.5% and 3%, which would be very good if we hadn’t had the artificially-sweetened spring and fall growth rates. Inflation remains at or above the Fed’s target and except for the trade war battered equity markets, there is every reason the FOMC should keep the normalization process going. What may be different is that the Committee may indicate it is willing to take a more wait and see attitude going forward. This buys the members time to see how the battles take shape. If a likely more puff than pastry agreement occurs, the Fed can continue on the path outlined this fall – three to four hikes in 2019. But if war breaks out, then the members know that all economic bets (and forecasts) are off and they can slow down. The earliest the next hike would occur is at the March 19-20 meeting. That should be far enough into the future that the shape of any trade agreement would be clearer. I have reduced my forecast to three hikes for next year, as I have no idea what the administration will do about a trade agreement with China. I don’t think there will be just two increases. If the situation is clarified and the economy continues to expand decently, we will get at least three increases. If there is a trade war, we might not get even one as economies and markets around the world would be in trouble.