KEY DATA: New Home Sales: -6.9%; Over-Year: +7%; Prices: 8.8%/ Claims: -1,000
IN A NUTSHELL: “The new home market is doing better than the existing home sector, but neither is in great shape.”
WHAT IT MEANS: Earlier this week we saw that existing home sales dropped in April, despite easing mortgage rates and today it was reported that new home demand also dropped. However, the decline in new home sales came after a huge jump in March, so what we really have is a movement back toward a more realistic level. Unfortunately, that level is not particularly high. Indeed, we need about a fifteen percent rise in purchases before we can categorize the new home sales pace as strong. Nevertheless, sales are on the upswing and we could see a double-digit increase over the 2018 totals. So far this year, total sales were up nearly seven percent and given how soft they were in the second half of last year, it would take a collapse in demand not to get at least a ten percent rise. As for the April report details, the one region reporting a rise was the Northeast, but that area makes up only about five percent of the total. The other three regions were down sharply. The median price jumped, but I would be cautious about the number. The distribution of sales across the price ranges has been strangely volatile the last few months, so let’s see what happens when things settle down.
New unemployment claims remain at incredibly low levels, a sign that the labor market remains extremely tight.
There were a couple of other reports released today that need to be looked at carefully. The April IHS Market manufacturing index fell to its lowest level since September 2009 while the services index dropped to its lowest point in over three years. We’ve known for a while that manufacturing is hurting but services may be following in its footsteps.
MARKETS AND FED POLICY IMPLICATIONS: The new home market may be outperforming the existing home market, but together, housing is not really doing much for the economy. In addition, more and more data are pointing to troubles in manufacturing, in no small part because of trade issues. And welfare payments are holding up the farm sector, which could get crushed once again by the tariff war. Yet the labor market continues to boom and CEO surveys point to business leaders being almost irrationally exuberant. In addition, households are pretty happy as well. So, what is going on? I guess it is time for my favorite saying: “You tell me and we both know!” I have growth below two percent this quarter but I am somewhat below consensus. On the other hand, I haven’t seen a whole lot of 3% estimates. Households continue to hold the key to the economic kingdom. April vehicle sales were pathetic and if we don’t see a sharp rebound in May, consumption could be really disappointing. That would make it extremely hard to get to two percent growth, so I am sticking with my forecast. The minutes of the last FOMC meeting indicated the members were more upbeat about growth. Even so, they don’t expect to raise rates this year and a slowing in growth would only support that. It would likely take at least two consecutive sub-two percent quarters to create a rate cut groundswell. So, rates are likely to remain steady for quite some time.