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A monthly report on new residential construction came out this week, showing a big drop in housing starts (the groundbreaking phase following a building permit). Should we worry about a slowdown in home sales?

The short answer is "no."  The long answer is a bit more nuanced, but in both cases, we're certainly not standing on the edge of the sort of cliff seen in 2008.

In the chart below, we can see the drop in Housing Starts on the far right.  At face value, it was disconcerting because it was the biggest drop in more than a year, but that's really the extent of the bad news.

2018-7-20 NL5 Big drops in housing starts happen from time to time.  And despite this particular drop, a positive trend remains intact.  

On a more substantive note, building permits didn't have nearly as bad of a month (they fell only 2.2% compared to a 12.3% slide in housing starts).  Volatility in 'starts' doesn't mean much unless it's accompanied by a similar slide in permits.

But let's not just assume it's random volatility and simply hope it goes away next month.  Let's dive deeper so we can put our minds at ease.  

Fortunately, diving deeper is pretty simple.  The first red flag is the fact that the Midwest region experienced a decline that was nearly 4 times as big as the next closest region.  That's too big to chalk up to random volatility in market data.

Indeed, it was not random!  If you're from the Midwest or if you keep tabs on the weather across the country, you know June was a crazy month for some of the largest metro areas.  Record high temperatures juxtaposed with flash floods understandably put a crimp on builders' plans to break ground. 

This accounts for the lion's share of the drama in housing starts.  In other words, if we factor out weather-affected areas, June's declines wouldn't be cause for concern.

If blaming it on the rain isn't quite enough for you, just consider new home sales in the context of total home sales.  The following chart shows that actual new sales numbers (not housing starts) are still trending higher.  Existing home sales are trending sideways in healthy territory (more than 5 million units per year).  When we put new and existing home sales on the same axis, we can see how they stack up against each other.  

2018-7-20 NL4 Bottom lines:

Builders didn't meaningfully slow down their permitting efforts Groundbreaking efforts were certainly affected by the weather Weather caveats aside, new homes are a much smaller piece of the pie when it comes to overall home sales numbers More importantly, home sales numbers haven't yet been affected (the alarming data pertains solely to groundbreaking) While the housing news ends up being much less exciting by the time we break it down, the week wasn't a total bust in terms of drama.  The most sensational news dealt with the President commenting candidly on the Fed's rate policy.  This is uncommon, to say the least.  The Fed is designed to operate independently and without regard for the preferences of lawmakers (except inasmuch as lawmakers nominate and confirm Fed officials, but we're nowhere close to a shake-up in that regard).

Trump essentially said he doesn't want the Fed to keep hiking rates.  The comments made waves because they were so unconventional, but they ultimately didn't have a huge effect on markets.  Lots of people would like the Fed to stop hiking rates, but the Fed's hands are tied by current economic realities.  If the president tries to untie them, the fallout would likely be severe--so severe as to make it highly unlikely.

The following is not required reading, as it's a bit technical, but for those who want to understand why the Fed's hands are tied, consider the following chart.  It shows the Fed Funds rate compared to the strength of the labor market and inflation.  In general, the Fed can raise rates as employment and inflation increase.  The only notable instance where the Fed kept rates steady in the face of rising employment was in the late 90's when inflation was plummeting. 

In other words, the Fed kept rates steady in order to combat falling inflation (too much is a bad thing, just ask Japan).  Contrast that to the present economic cycle where inflation is at 7 year highs, and the Fed only has one more reason to continue raising rates.  At the very least, there is no 90's-style justification to keep rates flat in the face of 4% unemployment.  

 2018-7-20 NL2 (Note: the spike in inflation in 2011 was a byproduct of the super low inflation during the Great Recession, and thus NOT something that would force the Fed's hand.  The Fed rightfully assumed that spike was temporary).

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The numbers: The U.S. created 213,000 new jobs in June, another hearty gain that shows companies are finding ways to fill open jobs despite a dwindling pool of skilled workers.

The gain in hiring topped the 200,000 forecast of economists polled by MarketWatch.

In a surprise, the unemployment rate rose to 4% last month after dropping to an 18-year low of 3.8% in May, the Labor Department said Friday.

The jobless rate rose largely because some 600,000 people entered the labor force. More Americans look for jobs when they are seen as easier to find, another sign the labor market is very healthy.

The number of people who were unemployed also grew by half a million, but the increase might be tied to changes in educational employment at the end of the school year.

The shrinking pool of labor is slowly forcing companies to raise pay as the competition for talent intensifies, but they are still managing to keep labor costs down.

Hourly wages rose a modest 5 cents to $26.98. The yearly rate of pay increases was unchanged at 2.7%.



What happened: White-collar professional firms filled 50,000 jobs last month to lead the way in hiring. Manufacturers added 36,000 jobs, health-care providers beefed up payrolls by 25,000 and construction companies hired 13,000 new workers.

The only segments of the economy to reduce employment was retail. Companies shed 22,000 jobs after hiring 25,000 workers in the prior month.

Adding to the bright picture, the government raised the number of new jobs created in May and April by a combined 37,000.

Read: Harley-Davidson isn’t riding off to Europe simply because of the Trump tariffs

Big picture: Many things are going right for the economy and the labor market is at the forefront. Rising sales are cajoling businesses to try to fill a record number of job openings.

The problem is finding enough talent, especially with so many baby boomers retiring. The U.S. has added some 19 million jobs in the last eight years and the unemployment rate could soon drop to levels not seen since the 1960s.

The labor shortage is a double-edged sword, though.

While workers could reap higher pay and benefits, rising labor costs could also spur the Federal Reserve to raise the cost of borrowing more aggressively. That would mean higher payments for mortgages, new cars and other consumer goods.

What they are saying?: “If payroll growth remains anywhere near 200,000, the downward trend in the unemployment rate will return in due course,” said chief economist Ian Shepherdson of Pantheon Macroeconomics. “We still target 3.5% by year-end.”

Market reaction: The Dow Jones Industrial Average DJIA+0.18% and the S&P 500 SPX+0.42% were set to open lower in Friday trades.

The stock market has gyrated up and down in the past few months amid worries about a widening trade war, with the U.S. and China each imposing fresh tariffs on Friday. Both indexes have receded from record highs set earlier in the year.

ReadU.S. trade deficit falls 6.6% to 19-month low just before Trump tariffs kick in

The 10-year Treasury yield BX:TMUBMUSD10Y-0.42% fell to 2.82% owing to the soft wage growth in the jobs report. The modest increase in wages suggests inflation is still well under control.

After reaching 3.1% last month, the yield has also fallen in response to growing trade tensions.

Source: MarketWatch

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Analysts are anticipating home prices to tick up, but decelerated to a lesser pace, according to CoreLogic’s latest Home Price Index (HPI®) report.


CoreLogic data found that May prices rose 1.1 percent month-over-month and 7.1 percent year-over-year. According to a forecast in the report, prices will have risen 0.3 percent in June, and increase 5.1 percent through May 2019.

Additionally, 40 percent of the 100 largest markets are overvalued, a condition CoreLogic defines as when “home prices are at least 10 percent higher than the long-term, sustainable” trend; 34 percent are at value, and 26 percent are undervalued (“at least 10 percent below the long-term, sustainable” trend).

According to Dr. Frank Nothaft, chief economist for CoreLogic, the dynamic is not in favor of first-time homebuyers, and, more homeowners are staying put, intensifying the inventory shortage. “The lean supply of homes for sale is leading to higher sales prices and fewer days on market, and the supply shortage is more acute for entry-level homes,” says Dr. Nothaft. “During the first quarter, we found that about 50 percent of all existing homeowners had a mortgage rate of 3.75 percent or less. May’s mortgage rates averaged a seven-year high of 4.6 percent, with an increasing number of homeowners keeping the low-rate loans they currently have, rather than sell and buy another home that would carry a higher interest rate.”

In an illustration of the imbalance in the market, 15 percent of homeowners and 41 percent of renters are aiming to buy a home in the next year, but only 11 percent of homeowners are planning to sell, according to a separate study by CoreLogic and RTi Research. “The CoreLogic consumer research demonstrates that, despite high home prices, renters want to get out of their rental property and purchase a home,” says Frank Martell, CEO/president of CoreLogic. “Even in the most expensive markets, we found four times as many renters looking to buy than homeowners willing to sell. Until more supply becomes available, we will continue to see soaring prices in cities such as Denver, San Francisco and Seattle.”

Source: CoreLogic

For more information, please visit www.corelogic.com.

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