Category Archives: New Home Sales

Durable Goods Orders, Economic Indicators, Gross Domestic Product, Income and Spending, New Home Sales

Revised Third Quarter GDP, November Spending, Income, Durable Goods Orders and New Home Sales

KEY DATA: GDP: 5.0% (revised up from 3.9%)/Consumption: +0.6%; Disposable Income; +0.3%/Durable Orders: -0.7%; Private Investment: 0.0%/New Home Sales: -1.6%

IN A NUTSHELL:   “The economy boomed in the summer and while growth may have moderated during the fall, it is still moving forward solidly.”

WHAT IT MEANS:  Lots of numbers today.  Third quarter GDP growth was revised upward to its strongest rate in eleven years.  The revision was powered by a realization that consumers spent a lot more than initially thought.   There was also better business investment activity.  It is nice that both households and businesses spent aggressively during the summer, but will that be sustained?  Maybe not at 5%, but we could easily get another number at or above 3.5%.  Consumer spending surged in November after a solid gain in October.  So much for a weak Black Friday.  The gains were across the board, when you adjust for price changes.  So far this quarter, real consumption is rising at a 3.7% annualized pace and that could come in even higher.  First, people have the money to spend.  Income, adjusted for inflation and taxes, surged in November and wage and salary gains were solid.  People are spending but the savings rate is fairly stable, a sign that households are not getting ahead of themselves.  Second, confidence is rising.  The Thompson Reuters/University of Michigan Consumer Sentiment Index rose sharply in December to its highest level in nearly eight years.  Happy people make for happy shoppers.

The manufacturing sector has helped lead the way but there are questions about how strong it will be going forward.  Durable goods orders fell sharply in November and that was with a pick up in civilian aircraft demand.  The report was mixed.  There was weakness in primary and fabricated metals, computers and defense aircraft.  On the other hand, orders for computers, communications equipment and vehicles were up.  Business capital investment was flat.

Housing has been moderating for a while and that trend seems to be continuing.  New home sales fell, surprisingly, in November.  Prices are rising, but not by much.  Indeed, the 1.4% increase over the year is much less than we are seeing in the existing market.  The Federal Housing Finance Agency’s October increase came in at 5% since October 2013.

MARKETS AND FED POLICY IMPLICATIONS: Patience is a virtue but it could also be an albatross around Janet Yellen’s neck.  (I never worry about mixed metaphors.)  The key to Fed policy is economic and wage growth and boy is it clear the economy has shifted gears.  The consensus for fourth quarter growth has been about 2.5%.  With the large upward revisions to third quarter growth, I am now closer to 3.5%, down from 4%, and the spending numbers support that estimate. While housing may not add much, the real uncertainty is consumers emptying shelves and causing inventories to drop.  That would moderate fourth quarter growth but when warehouses are restocked in the first quarter, activity would accelerate.  Regardless, the economy is in very good shape, probably better than the FOMC realized when it met and when Janet Yellen said she would be patient.  The Fed may want to be patient and err on the side of too much inflation, but the strong job gains are likely to continue and lead to solid wages increases fairly soon.  The FOMC may have to move earlier than most now expect.  Investors should love today’s numbers but once they stop drinking the spiked eggnog, they may realize that strong growth pushes forward the time when the Fed removes the syringe from the markets.  But for now, it is time to celebrate.

Have a Happy and Healthy Holiday!

Consumer Sentiment, Economic Indicators, New Home Sales, Pending Home Sales

October New Home Sales, Pending Home Sales and November Consumer Confidence

KEY DATA: New Homes: +0.7%/Pending Sales: -1.1%/Consumer Comfort: up 2.2 points

IN A NUTSHELL:   “The housing market is marking time but improving consumer confidence may be coming at just the right time.”

WHAT IT MEANS:  The housing market has been adding to growth since the winter wipeout but the impact has slowed.  That trend may be continuing.  New home sales did increase a touch in October, but only because the September pace was revised downward.  Builder confidence has been rising so the small gain, though better than some thought, was a surprise to me.  The level of purchases has been in a tight pattern for the past three months and it is still below 500,000 a month, annualized.  Strong sales would be around one million, so the sector has a long way to go.  Demand was strong in the Northeast and Midwest but off in the South and West.  Prices, however, did surge.  The high end of the market looks like it may be coming back.

Pending home sales, which are signed contracts for existing homes, dropped in October.  There were declines in all regions except the Northeast, which posted a modest rise.  This does not bode well for existing home sales, which are likely to rise minimally, if at all,

On a positive note, The Thompson Reuters/University of Michigan consumer sentiment index rose in November.  That was in sharp contrast to the large decline posted by the Conference Board’s confidence index.  There was a small fall off from the mid-month reading, but sentiment hit a level not seen in more than seven years.  Both current conditions and expectations were up.  This report is also supported by an increase in the Bloomberg Consumer Comfort Index to its highest level since December 2007. 

MARKETS AND FED POLICY IMPLICATIONS: Housing is just not improving very much at all.  But while it is critical that this market get going, for the holiday shopping season, the consumer numbers are what really matter.  I had mentioned in my commentary on the Conference Board’s confidence number that the decline made little sense.  That two other reports point to improving confidence is more in line with logic.  But logic and household perceptions don’t necessarily go hand-in-hand so we have to be a little uncertain about what people are thinking.  If confidence is rising, which I tend to think it is, then we could be in for a very good fourth quarter spending number.  That is what we really need.  So on that note, let me say to everyone:

Have a Happy Thanksgiving!

Economic Indicators, Leading Indicators, New Home Sales, Philadelphia Fed Index

October Existing Home Sales, Leading Indicators and November Philadelphia Fed Index

KEY DATA: Home Sales: +1.5%; Leading Indicators: +0.9%; Phila. Fed: up 20.1 points

IN A NUTSHELL:   “It is looking more and more like the economy is accelerating.”

WHAT IT MEANS:  Where should I start?  How about the outlook for the future?  The Conference Board’s Index of Leading Indicators jumped for the second consecutive month, and the stock market didn’t even help this time!  If this measure has any predictive capacity, and it does, then it is pointing to a lot stronger growth in the months to come.  A second indication that growth may be picking up was the huge increase in the Philadelphia Federal Reserve Board’s Business Outlook Survey’s activity index.  This index does bounce around but the enormous rise points to a clearly improving manufacturing sector.  There was a special set of questions asked about employment and almost 56% of the respondents say that they expect to hire in the next twelve months.  That is up about ten percentage points since January and the major reason is that firms expect sales to rise.  The positive sales outlook should not be a surprise given that only 1.7% of the respondents expect growth to slow over the next six months.

For the economy to really hit its stride, we need the housing market to at least hold up its part of the deal.  Existing home sales rose in October and demand has finally clawed back above where it was when rates spiked.  For the first time since October 2013, the year-over-year change was positive.  The increases across the nation were solid but there was a decline in demand in the West.  Prices seem to firming again, in part because of the inventory is shrinking.  Rising prices is critical if homeowners are to have enough equity to sell their current houses and move into different ones.  That churn has been missing from the market.

MARKETS AND FED POLICY IMPLICATIONS:  What a day for the economic data.  While overall inflation may be restrained, we saw that services inflation is coming back and the level of jobless claims points to additional strong employment reports.  Now it appears that housing is picking up, albeit slowly, while manufacturing may be poised for a large increase.  When you add those numbers the jump in the leading indicators, you really have to feel optimistic about the economy.  The Fed is debating the use of the term “considerable time” when it comes to keeping rates low.  But the members may dump that phrase as early as the mid-December FOMC meeting if the economic numbers continue to show increasing economic and labor market strength.  They may also have to start talking about services inflation, something that really needs to get the attention that has been missing.  But investors like to focus on the positive and the latest numbers only feed the bullish beast.

Economic Indicators, New Home Sales

September New Home Sales

KEY DATA: Sales: +0.2%; Year-over-Year: +17.0%; Prices (Year-over-Year): -4.0%

IN A NUTSHELL:  While the existing home segment is starting to run, the new home portion continues to take only baby steps.”

WHAT IT MEANS:  The housing market is moving forward, but the gains are hardly great and there are some weak segments.  The existing home part is in pretty decent shape as sales continue to rise and are nearing what we could call decent levels.  But the new home recovery is still in its infancy.  Yes, sales did rise to their highest level in over six years, but the rate is still way less than what would be considered healthy.   Also, the August number was revised downward sharply, which was the real reason September posted a gain.  Looking across the nation, demand jumped in the Midwest, rose moderately in the South, was flat in the Northeast and cratered in the West.  As for prices, they look to be on the way down.  There was a decline as builders may be downsizing to better match the market.  The number of homes on the market went up but given the sales pace, there is no major inventory overhang.

MARKETS AND FED POLICY IMPLICATIONS: Housing is the most enigmatic sector in the economy.  It is up, then down and then up, but only in parts and only in fits and starts (pardon the pun).  While it is nice that the existing home segment is basically back, we really need more the new home portion to be hale and hearty if overall economic growth is to be strong.  That is hardly the case right now.  Sales are under one-half million units annualized and that needs to at least double.  That could take a while, which is probably a major understatement.  Thus, housing starts, at least for single-family dwellings, is likely to remain less than we would like to see for, to coin a phrase, “a considerable time”.   This is not a report that should move almost anyone.  I have no idea what motivates investors right now but Fed members will not see this report as saying the housing market is so strong that rates should be hiked.  The FOMC meets Tuesday and Wednesday and we get third quarter GDP the day after, so things should heat up.  But for now, there is no reason to believe that QE will not be ended or the Fed will remove “considerable time” from its statement.  The December meeting could be different.

Economic Indicators, New Home Sales

August New Home Sales

KEY DATA: Sales: +18%; West: +50%; Inventories: -14.3%: Prices (Year-over-Year): +8%

IN A NUTSHELL:   “Home builders have become very optimistic and the explanation is simple, sales are rising!”

WHAT IT MEANS:  There has been a disconnect between the attitude of residential developers and the new home sales and housing starts data.  I have argued frequently that builders don’t smile unless they are selling something and right now, at least according to the National Association of Home Builders, they are giddy.  So housing sales had to have been rising and the August data finally point in that direction.  Sales surged, but the level of demand is a bit suspect.  There was a 50% jump in the West to a sales level not seen since January 2008.  Meanwhile, in the rest of the country, demand is solid, if not strong, but nowhere near as exuberant as we saw in the West.  Basically what I am saying is that there may be a bit of a seasonal factor issue involved in the West’s increase, which may come out in the September numbers.  That said, it is likely that sales are rising and probably sharply.  Indeed, we still need the sales pace to increase about fifty percent before we can say the new home market is really strong.  Prices seem to be holding in, as the 8% year-over-year increase is similar to what we have seen much of the past couple of years.  The number of homes for sale rose but the number of months of supply came down sharply because of the jump in the sales pace.

MARKETS AND FED POLICY IMPLICATIONS:  Even if the extent of the increase in new home sales is somewhat overstated, it is likely that demand is rising pretty solidly.  We haven’t seen this increase in sales show up in the starts numbers but that too is coming.  And when it does, it will be clear that the housing sector is doing just fine and can likely withstand the coming increases in mortgage rates.  The idea that a 5.5% or even a 6% 30-year fixed rate mortgage or a 4.5% to 5% 15-year rate would kill the market is, at least to me, bizarre.  Over the last twenty years, the 30-year rate has averaged 6.2%.  During the housing boom of 2003 through 2006, the rate averaged 6.0%.  We suffer from a false frame of reference.  Saying 6% is high may be true given the historically low levels that were created during the Great Recession and Disappointing Recovery, but they are clearly not normal rates.  Once it is accepted that the economy is in good shape and even the Fed figures that out, mortgage rates will rise, possibly quickly.  But that doesn’t mean the housing market will tank. Fed Chair Yellen doesn’t want to see another 100 basis point rise that occurred when tapering was announced, so she is going slowly on removing “considerable time” from its statement.  But that is just image.  The economic reality will drive Fed decisions and rate hikes are coming sometime during the first half of next.  Investors need to get their heads around the reality that higher rates are actually good because they represent a strong economy and solid growth supports improving demand in even interest sensitive sectors such as housing.

Economic Indicators, New Home Sales, Weekly Jobless Claims

June New Home Sales and Weekly Jobless Claims

KEY DATA: Sales: down 8.1%; Jobless Claims: 284,000 (down 19,000)

IN A NUTSHELL:  “The labor market may be getting better but wage gains are not and until that happens, families will not be buying new homes at any great pace.”

WHAT IT MEANS: When it comes to economic numbers, today’s data were the best of times and the worst of times.  First the good news.  Jobless claims dropped to their lowest level in over eight years.  And when you adjust for the size of the labor force, you have to go back to 1999.  Clearly, the labor market is tightening, but we have to be a little cautious about the July claims numbers.  The vehicle makers don’t close plants in the same pattern that they used to when July was standard changeover to new model time.  Thus, the seasonal adjustments may be a little out of whack and it wouldn’t be surprising if the number gaps upward next week.  It will still be low, but not as eye-catching as today’s number.

While the job market may be getting better, the housing market is not, at least when it comes to new home sales.  Builders saw demand plummet in June and the decline was across the entire nation.  The largest fall off was in the East, where sales plummeted 20% while the West saw demand decline by just under 2%.  The supply of homes for sale is continuing to rise and that growing inventory could lead to improving sales as buyers have more options to choose from.

MARKETS AND FED POLICY IMPLICATIONS:  While the declining housing sales are troubling, they really didn’t make a lot of sense.  It is hard to believe that builder confidence is jumping, as we saw with the jump in the Home Builders’ index, while sales are falling.  So I am a little suspect about these data.  Meanwhile, the jobs numbers are just getting better and better and for me it is all about the labor market.  Not to sound too much like the broken record that I am, the missing link in this recovery continues to be solidly growing worker income.  We saw this week that in June, earnings were flat again and adjusting for inflation, they declined.  It is hard to make a commitment to buy a house when you don’t have increasing funds.  But that is likely to change.  The low levels of claims points to another solid jobs report and we could see the unemployment rate decline to 6% or even lower when the July data are released next Friday.  Now there are many who simply do not believe that worker compensation will accelerate any time soon.  But unless the law of supply and demand has been repealed for the labor market, the tightening of conditions will force firms to start bidding for workers.  There may be resistance to doing that and the appearance of wage pressures may take longer to show up as a result, but it is coming and probably sooner than most think.  When household incomes start rising, they will be better able to qualify for mortgages while the resulting increase in confidence will likely also encourage more home purchases.  The Fed will likely wait to until wages are actually rising before any decision to increase rates is made.  The old saying that “if you wait to see the whites of inflation’s eyes before tightening you have waited too long” seems to have been discarded by the Yellen Fed.  As for investors and business owners, they dismiss the warning signs about growing wage pressures at their own peril.