August New Home Sales

KEY DATA: Sales: +3.5%; Prices: +1.9%

IN A NUTSHELL: “With the previous few months of new home sales being revised downward, it is hard to say the August increase is good news.”

WHAT IT MEANS: The Fed is raising interest rates, energy prices are rising and household income growth is modest. What does that tell you about the future of the housing market? That it is going nowhere. There was a nice rise in new home sales in August, but the gain was just enough to take us back to where the July numbers were before they were revised downward. Demand for newly constructed units peaked last November and have been going downward since then, though in a saw tooth manner. Thus, the rise in August should not be taken as a sign that conditions are firming. Looking across the nation, demand spiked in the Northeast, was up sharply in the West, increased modestly in the Midwest, but fell in the South. The South is the big dog, as over 55% of the sales are in that region, so weakness there drags down the national number. Hurricane Florence will likely cut sales initially, but a lot of homes will have to be replaced, so the data for the fall and even early winter should be looked at with caution. As for prices, the medium sales value was up modestly, another indication that the sector is softening.

MARKETS AND FED POLICY IMPLICATIONS: The Fed’s decision on rates will be out soon so this number will likely be a tree falling in the forest. But the likely rate hike, coupled with inflation pressures that are building from the increase in oil costs, tariffs and strong growth, are expected to keep up the pressure on longer-term rates as well. Thus, homebuyers are finding both variable and fixed rate mortgage costs rising, making affordability a growing issue. As for the Fed, the statement, projections and Chair Powell’s press conference may provide some insight into how many more rate hikes we will see. The Fed is sailing somewhat blindly, as who knows how the trade wars will play out. The problem is that there is the potential for both higher inflation and slower growth in the near term. The benefits, if there are some, are more longer term. Since the Fed doesn’t have any idea about the magnitude of either impact, they have to pick which error they want to make: Too much tightening to guard against inflation or too little to guard against an economic turndown. This is when they start earning the big bucks.