KEY DATA: Sales: +5.1%; 1-Family: +5.6%; Median Prices: +7.9%; 1-Family: +8.6%
IN A NUTSHELL: “The housing market has rebounded sharply and now looks to be a leading part of the spring economic acceleration.”
WHAT IT MEANS: Another day, another indication that the economy is in really good shape. The existing housing market was a disaster in the first quarter, as sales tanked. But that was clearly a winter issue and the rebound is really strong. The National Association of Realtors reported that existing home sales jumped in May to their highest level in 5½ years. And the details were just as good as the headline number. Demand improved in every region, led by a double-digit gain in the Northeast. Purchases of single-family homes led the way as condo demand improved modestly. We are also seeing a sizable shift in the profile of buyers, out of investors and distressed properties and into first time buyers. While the number of homes on the market rose, when adjusted for the sales pace, inventory actually declined. The shortage in homes is restraining total sales and since buyers are bidding on limited product, home prices are soaring, especially in the single-family component of the market.
MARKETS AND FED POLICY IMPLICATIONS: Second quarter economic growth is setting up to be very solid if not even strong. The indicators that had gone south in the winter are coming back in the spring. Households are buying homes and vehicles, a clear sign that they are feeling better about their financial situations. We get May new home sales tomorrow and with builders’ optimism strong, I would expect that report to exceed expectations as well. But the big number this week is Thursday’s income and spending report. We know that retail sales were robust in May but we don’t have any idea about spending on services, which is two-thirds of consumption. If that shows another decent rise, then we could be getting a strong boost to GDP growth from consumption. With household spending and housing on the upswing, the next logical domino to fall would be business investment. Since the trade deficit is stabilizing, there is hard to find any real weakness in the economy. The Fed doesn’t seem to get that yet, but ultimately the members will figure it out. By the time Janet Yellen meets the press again in September, it will be hard for her to argue that she will need more support for a rate hike. As long as Greece doesn’t create too much chaos, there seems to be little standing in the way of strong growth the rest of the year and a rate hike in September. That should be good news for investors, at least if they love U.S. companies. Yes, it means the Fed is going to do what it keeps saying it is going to do, but a stronger economy means that domestic companies should do well going forward.