KEY DATA: Sales: -3.3%; Prices (Year-over-Year): +8.9%/ Leading Indicators: +0.7%/ Claims: +10,000
IN A NUTSHELL: “While housing sales are still yo-yoing, an improving economy and rising prices should lead to better activity in the months ahead.”
WHAT IT MEANS: It’s the housing two-step: One month up, the next month down. That said, the market is improving as the trend in demand is up. In April, the National Association of Realtors reported a small drop in existing home sales. But demand did jump in March to the highest rate in eighteen months. One major reason for the failure of sales to rise more consistently is a lack of supply. The inventory of homes for sale did jump, but it is still lower than last April. It is hard to sell homes when product is limited. That may change as prices are surging in almost all regions. The lack of available houses for sale is forcing buyers to bid up prices. While that may seem to be a negative for the market, it is not. As equity increases, more people will be able to move and that will raise supply and increase sales. Also, rising prices, in a manner similar to rising mortgage rates, would force buyers to make decisions more quickly and that too could increase the sales pace.
But maybe the biggest impact on the housing market could come from the economy itself. The Conference Board’s Leading Economic Index surged in April after a strong rise in March. If you believe this measure does portend future activity to at least some extent – and I do – it looks like we are in for strong growth in the months ahead. The Conference Board’s measure of current activity improved, further pointing to an end of winter slump.
Jobless claims rose last week but that is hardly the story. The level remains quite low and the four-week moving average, which smooth’s out the weekly ups and downs, is at historic lows when you adjust for the size of the labor market.
MARKETS AND FED POLICY IMPLICATIONS: We still have not fully recovered from the damage done by the housing bubble and the biggest problem remains home values. You cannot sell your home if you are under water and if you want to buy a new house, you need enough equity to put down on your next home. The worry about rising prices, at least for now, is misplaced. We need higher prices to reduce the biggest impediment to higher sales: Low inventory. Thus, I welcome higher prices. The jump in the leading indicators points to improving activity ahead and the claims numbers show that firms are holding on to their workers as tightly as possible and that combination can only lead to higher wages. The Philadelphia Fed’s May Manufacturing Business Outlook report indicated that to attract workers, nearly half the firms are raising wages. It is not the case for all new workers, but with a majority of the respondents hiring, how they will get those workers without raising salaries is anyone’s guess. Solid job gains and a further rise in wages would be enough to push the Fed to tighten. The members want to get back to a more normal rate structure and the sooner the better.