2018 in Review: A Stronger Economy vs. a Slowing Housing Market

About this same time a year ago, I wrote about an economy which was gradually building enough strength to spark inflation, thus impacting costs for suitable land, labor and materials.  Following that, the tax cuts enacted at the beginning of 2018 have certainly turbo-charged an already improving economy, resulting in robust consumer confidence, more job openings than candidates to fill them, and the lowest unemployment rate in nearly 50 years.

For the housing market, however, rising interest rates, lack of inventory and high prices have definitely conspired to slow sales for both new and existing homes.

U.S. GDP growth, which averaged 2.3 percent in 2017, surged to 4.2 percent by the second quarter of 2018, slipping to a still-strong advance estimate of 3.5 percent during the third quarter.  Notably, it was increasing consumer spending during the third quarter which made up for a slowdown in business investment. Still, current forecasts are suggesting this rate of growth to fall below 3.0 percent during the final quarter of the year.

Job growth, which rose by 250,000 in October, averaged 212,500 per month through the first ten months of 2017 (up 18.3 percent from the same period of 2017), with much of that growth noted in the fields of construction, manufacturing, health care and professional services.  In addition, October’s official unemployment rate of 3.7 percent is the lowest reported since mid-1969.

Not surprisingly, as of the end of September, the number of unfilled jobs was nearly 18 percent higher than the number of officially unemployed persons, which is the primary reason we’re starting to see more wage inflation of close to 3.0 percent per year.

Speaking of inflation, the Federal Reserve has been keeping it mostly in check so far in 2018 with three rate hikes, and a fourth planned for December.  However, given that the Producer Price Index – which tracks wholesale input prices – jumped by 0.6 percent in October (or three times what was forecast), the odds for that fourth rate hike have certainly increased.

Still, the Consumer Price Index remains fairly tame, rising by 2.3 percent year-on-year through September versus 2.1 percent in 2017.  Moreover, the annual increase in the Fed-preferred PCE Price Index has been trending lower since the summer months, falling to 2.0 percent by September.

Consumer confidence has also helped prop up the economy in 2018, with the University of Michigan’s widely watched sentiment index remaining at its highest year-to-date level since 2000.  Even stock market volatility, inflation and polarized politics have done little to dent consumer confidence, with consumers feeling flush enough to tap their savings or borrow money to fund their purchases.

Nonetheless, a booming economy with rising inflation and home prices often takes an eventual toll on the housing market.  Although builder confidence remained strong at 68 in October, building permits took a breather in September, slipping slightly from both the previous month and the same month of 2017.  September housing starts also dipped moderately from August, but were up 3.7 percent year-on-year.

Yet it was September’s preliminary new home sales which dropped the most, falling 13.2 percent year-on-year to the lowest level in nearly two years as the months of supply jumped to 7.1 months, the highest since March of 2011.  However, since this data is regularly revised, it’s possible that new home sales have merely flattened out in line with building permits.

In its own survey, the Mortgage Bankers Association showed September new home mortgage applications up 8.2 percent year-over-year, and year-to-date sales for 2018 were still up 3.1 percent versus 2017.

For existing homes, a combination of low inventory for starter homes and higher interest rates helped drive down September sales down 4.1 percent year-on-year, for the lowest annual sales rate since November 2015.

Unsold inventory rose slightly to a 4.4-month supply, up from 4.2 months a year ago, while the median sales price rose 4.2 percent, for the 79^th straight month of year-on-year gains. Although September pending home sales did rise slightly from August, they were still down 1.0 percent year-on-year, and have fallen on an annual basis for nine consecutive months.

Another indicator of affordability, the NAHB/Wells Fargo Housing Opportunity Index, fell to 56.4 percent in the third quarter of 2018, for the lowest rate since the same quarter of 2008, and down sharply from the last peak of 77.5 in 1Q 2012.  Consequently, in the months ahead, look for more affordable supply and rising wages to counteract higher interest rates in order to keep the housing market humming.

2Q 2018 productivity up 2.9 percent from 1Q versus 1.3 percent year-on-year

Nonfarm business sector labor productivity increased 2.9 percent during the second quarter of 2018, as output increased 4.8 percent and hours worked increased 1.9 percent. From the second quarter of 2017 to the second quarter of 2018, productivity increased 1.3 percent, reflecting a 3.5-percent increase in output and a 2.2-percent increase in hours worked.

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June construction spending fell by largest amount in over a year, but previous months' totals revised upwards

Construction spending fell 1.1 percent in June, the largest decline since April 2017. However, data for May was revised up to show construction outlays rising 1.3 percent instead of the previously reported 0.4 percent gain, and April's outlays increased 1.7 percent instead of the previously estimated 0.9 percent.

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Gallup: Nearly 4 in 10 of Americans cite the economy as the nation's most positive factor

According to a Gallup poll, 37 percent of respondents cited the economy or jobs as nation's biggest positive factor. This marks a 14-year high in Gallup's monthly poll series.

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Gallup: June consumer spending highest in that month since 2008

Americans' daily self-reports of spending averaged $103 in June, similar to their average of $104 in May. Last month represents the highest level of reported June spending since 2008, when spending averaged $104. It falls just short of the nine-year high of $114, from May 2008.

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Richmond Fed: Manufacturing survey improves sharply in June

Reports from Fifth District manufacturers improved in June, according to the latest survey by the Federal Reserve Bank of Richmond. The composite manufacturing index rose from 1 in May to 7 in June, as the indexes for shipments and new orders increased. The employment index was relatively flat. Most firms continued to report steady or higher wages; although the index for wages did fall in June, it remained above 0. Meanwhile, more firms reported a decline in the average workweek than reported an increase.

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April wholesale sales fell 0.4 percent from March but still up 7.3 percent year-on-year

April 2017 sales of merchant wholesalers fell 0.4 percent from the revised March level, but were up 7.3 percent from the April 2016 level.


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Federal Reserve meeting minutes suggest another rate hike possible in June

Federal Reserve officials expected at their policy meeting this month that it would "soon be appropriate" to raise short-term interest rates, a signal the U.S. central bank could move in June at its next gathering.

The Fed also moved toward a consensus on a proposal to start gradually shrinking its $4.5 trillion in holdings of Treasury and mortgage securities later in the year.

2016 in Review: Continued Recovery from The Great Recession

At this same time a year ago, I wrote about a housing rebound that had continued its slow yet gradual climb back to normal.  The good news has continued in 2016, so much so that it’s widely expected for the Federal Reserve to hike its benchmark interest rate by the end of the year.

U.S. GDP -- which had hovered closer to 1.0 percent during the previous three quarters ---- surged to 2.9 percent in the third quarter, due mostly to rising inventory of goods, higher exports, and more federal government spending.

Job growth, which rose by 161,000 in October, has averaged 181,000 per month throughout 2016. Although this is down 21 percent from 2015’s average level, it is still more than enough to keep up with population growth and continue putting downward pressure on the official unemployment rate.

Nonetheless, there is an important caveat here to consider: Although a 4.9 percent unemployment rate implies that the economy is more or less at full employment, by also including discouraged workers, the under-employed and those persons marginally attached to the workforce, the unofficial unemployment rate rises to 9.5 percent – or exactly matching what it was in October 2015.

This higher unemployment rate is also why wages had been stubbornly flat during this long economic recovery, although over the last 12 months they did rise by 2.8 percent, thus giving workers a slight edge over inflation.

Speaking of inflation, after years of it remaining flat or even dipping into deflationary territory, it’s now returning, which is why higher interest rates are on the short-term horizon.  For the 12-month period ending in October, the Consumer Price Index rose 1.6 percent, and by 2.1 percent when subtracting out more volatile indices for energy and food.  Even the supply-side Producer Price Index rose by 1.6 percent during the same time period, which is a big jump from a year ago, when it was less than 0.5 percent per year.

Confidence is trending higher, with the University of Michigan’s Consumer Sentiment Survey edging up to 91.6 in its preliminary November reading – up 5.0 percent from October and 0.3 percent from a year ago. At the same time, builder confidence has remained at well over 60 for three consecutive months (anything over 50 is positive), and is approaching 70 for single-family home sales now as well as over the next six months.

Supporting this confidence was a surge in housing starts in October to a nine-year high, up by over 25 percent from the previous month and over 23 percent year-over-year to an annual rate of 1.3 million. Although October building permits rose by much smaller amounts, the annual rate of 1.2 million demonstrates that the strength in starts is likely to continue.

Still, given tight levels of supply in most markets, affordability remains a concern, with 61.4 percent of families earning the median income able to afford the median-priced home at prevailing interest rates in the third quarter of 2016. While this rating from the Wells Fargo Housing Opportunity Index is down sharply from the last high of 77.5 noted in the first quarter of 2012, it remains far above the previous trough of 40.4 set in the third quarter of 2006.

Single-family new home sales, which dipped in August, rebounded by over three percent in September to 593,000 per year, and were up by nearly 30 percent year-over-year. So far in 2016, new home sales have averaged 564,000 per month. At current sales rates, existing inventory would take 4.8 months to sell, down a full month from a year ago.

For existing homes, sales also rebounded 3.2 percent in September to 5.47 million per year, but are up just 0.6 percent year-over-year. Much of this increase was due to the share of first-time buyers reaching 34 percent, for the highest rate seen in over four years. Although September inventory rose slightly to just over two million homes – or a timeline of 4.5 months -- it has fallen year-over-year for 16 consecutive months.

Looking ahead to 2017, pre-election forecasts had suggested a GDP growth rate of two percent. Meanwhile, the NAHB is calling for single-family starts to rise by 12 percent, multi-family starts to decline by two percent after a strong showing in recent years, and remodeling activity to surge by 23 percent. For all non-residential projects, Associated Builders and Contractors (ABC) is forecasting growth of three percent, with commercial projects rising by over eight percent and industrial projects shrinking four percent.

Federal Reserve’s Beige Book reports modest growth thru mid-May

The economy grew at a modest pace in much of the country from April to mid-May, leading to tightening labor markets and higher wages.

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March column for Builder & Developer magazine now online

My column for the March 2015 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "The Housing Rebound Continues, Version 2.0" I wanted to revisit the state of the economic rebound as well as the slow recovery in the housing market.  An excerpt:

Last December, I wrote about a slow but steady housing rebound that seemed to suggest an even stronger 2015, and this is certainly still the case. However, more updated economic information from the fourth quarter of 2014 and the first part of 2015 seem to point to a different type of animal: Look for 2015 to be the year that we see the continued return of the retail buyer, and especially the first-time home buyer...

Until the prime-age employment-to-population ratio rises from the current 77.2 to closer to 80 percent, the U.S. economy likely won’t see consistent and meaningful wage growth. It is mainly due to this weakness in wage growth— along with inflation that remains below its target of two percent and the decline in GDP during the fourth quarter of 2014—that Federal Reserve Chair Janet Yellen has continued to postpone any hike in short-term interest rates...

To read the entire column, click here.

To read the entire March 2015 issue in digital format, click here.

2014 in Review: A Slow, Gradual Return to Normal

Last year, I wrote about a housing rebound that seemed to finally have solid legs after a few false starts since the Great Recession.  The good news for 2014 is that both the economy and the housing market have continued their slow yet gradual climb back to normal.

Indeed, the NAHB’s Leading Markets Index, which measures how well metropolitan areas are performing relative to their last ‘normal’ market, rose to .90 in the third quarter of 2014.  This means that the combination of permits, prices and employment levels are back to 90 percent of where they should be at a national level, although most of this rebound has been due to new permits and rising prices more than robust, uniform employment gains.

Still, the national job market continues to improve strongly, adding well over 200,000 jobs per month for most of the year, thereby bringing the official unemployment rate down to 5.8 percent.  Since this rate of growth is about double the pace required to reduce unemployment and under-employment, wages could soon come under pressure to rise after years of being stuck near neutral, which could counter-act the impact of future interest rate hikes and higher housing prices.

At the same time, the economic rebound has not been consistent across the country, with much stronger job growth in those states which have benefitted from the domestic energy boom, military or agricultural spending, or include small college towns.   Conversely, those states with weaker labor markets – such as Arizona, Nevada, Rhode Island or New Jersey – also continue to exhibit weaker housing fundamentals.

Nonetheless, from a confidence standpoint, both builders and consumers have been reporting positive attitudes, with the NAHB Housing Market Index rising four points in November to 58, with even stronger gains for the index measuring current sales conditions.  Consumer sentiment has recently been even stronger, rising in November to more than a seven-year high even though respondents don’t expect future income gains to keep up with inflation.

While overall housing starts did take an unexpected but small dip in October from the previous month, they still rose by nearly eight percent year-over-year.  At the same time, starts for single-family homes were still up by just over four percent between September and October to the highest rate since November of 2013.   But it was really building permits – often a forward-looking indicator of market activity – which revealed gradually building strength for housing, rising by nearly five percent in October to the highest level in nearly 6.5 years.

New home sales have also continued to climb, rising by 17 percent between September of 2013 and 2014 to an annual rate of 467,000 units, which would take 5.3 months to sell at current sales rates, down from 5.5 months the previous year.  New home median prices, however, fell to $259,000 from $269,800 during that same time period, most likely due to a higher percentage of sales in the South.

For existing homes, sales rose in October for the second straight month after a challenging spring and relatively flat summer, reaching their highest annual rate since September of 2013 as well as being above year-over-year levels for the first time in over a year.  At the same time, inventory levels fell to a 5.1-month supply, which was the lowest supply timeline since last March.  Existing home prices reached $208,300 in October, up by 5.5 percent over the same month of 2013 and marking the 32^nd straight month of year-over-year price gains.

The remodeling market is also strong, with the NAHB Remodeling Market Index matching its record high of 57 in the third quarter of 2014 even after a dip in activity earlier in the year due to an unusually harsh winter.

Looking ahead to 2015, forecasts are generally calling for continuing expansion for both the U.S. economy and its housing market.  U.S. GDP is expected to sustain its 3.0 percent growth rate due to ongoing fiscal stimulus, lower energy costs (especially for gasoline), slowly easing credit conditions and more positive business and consumer confidence.  However, a stronger dollar will likely dampen exports, and the Fed will probably start boosting its Federal funds rate sometime in 2015.

As for housing, look for housing starts to rise by another 20 percent in 2015, with most of that increase noted for single-family homes built to fulfill a large supply of pent-up supply over the past few years.  Still, as household formations increase in 2015, look for the rental market in urban markets to remain tight as rent growth exceeds inflation.

December column for Builder & Developer magazine now online

My column for the December 2013 issue of Builder & Developer magazine is now posted online.

For this issue, entitled "The Rebound Enters Adolescence" I reviewed what happened with the economy and the housing market in 2013 and what to expect in the year ahead.

An excerpt:

A year ago, I wrote about the excitement of a housing rebound that finally seemed to have legs, with all relevant indices showing positive growth. Today, despite numerous economic and political headwinds that have been regularly buffeting the demand for new homes, I think it’s safe to say that the rebound is here to stay, but is transitioning into the next stage which will likely face steeper interest rates, tighter lending standards and higher building costs...

To read the entire column, click here.

To read the entire December 2013 issue in digital format, click here.

Interview with author Anthony Downs, "Real Estate and the Financial Crisis"

Yesterday I interviewed Dr. Anthony Downs, author of the new book out by the Urban Land Institute called "Real Estate and the Financial Crisis: How Turmoil in the Capital Markets is Restructuring Real Estate Finance."

Downs, who received his PhD in Economics from Stanford University, is a senior fellow at the Brookings Institution as well as a well-known writer and speaker, and has consulted with the nation's largest corporations, developers and government agencies.

This latest title marks Tony's 27th book, which I'll soon be reviewing for the Inman News service, but for now you can listen to the podcast on the widget below (due to a minor technical glitch, my bumper music started playing during the intro, which threw me a bit. But that's show biz!). Downs has also written "Niagara of Capital: How Global Capital Has Transformed Housing and Real Estate Markets," "Still Stuck in Traffic," and "Growth Management and Affordable Housing: Do They Conflict?" Earlier in his career, he also wrote "An Economic Theory of Democracy" and "Inside Bureaucracy."



If you want to buy this book from Amazon.com click on the link below.

Do continuing job losses mean a greater economic shift?

You've probably heard terms before like "creative destruction," in which new technologies and ways of doing business can transform entire industries. But what happens if the entire economy is facing a generational shift? From a story in the New York Times:

Another 651,000 jobs disappeared from the American economy in February, the government reported Friday, as the unemployment rate soared to 8.1 percent — its highest level since 1983.

The latest grim scorecard of contraction in the American workplace largely destroyed what hopes remained for an economic recovery in the first half of this year, and added to a growing sense that 2009 is probably a lost cause...

The acceleration has convinced some economists that, far from an ordinary downturn after which jobs will return, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies have opted to abandon whole areas of business...

For American policy makers, such a reality poses fundamental challenges to the traditional response to hard times. For decades, the government has reacted to economic downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to deliver needed jobs.

This time, argues Mr. Silvia, the government needs to put a much greater emphasis on retraining workers for careers in other industries.In the auto industry, for example annual American car sales have dropped from some 17 million a year a few years ago to 9 million now. Even if sales increase to 10 or 12 million, that still leaves a lot of unneeded factories...

Much the same can be said for financial services, which gave up another 44,000 jobs in February. During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other exotic flavors of investments. That industry is unlikely to return to anything close to its former shape...

Click here for full story.

Miss the 2009 Economic Outlook for Orange County?

On Monday night there were about 550 people at the Irvine Marriott listening to economic analysis and forecasts by economist Chris Thornberg of Beacon Economics and his Director of Regional Research, Brad Kemp. I was fortunate enough to be able to introduce them and to suggest why the building industry needs forthright analysts and consultants now more than ever.

Firstly, if you missed the event you can still download their slide presentations here:

Thornberg: National Outlook

Kemp: Regional Outlook & Forecast

Please keep in mind that these forecasts are for "worst-case scenarios," so pricing declines for homes (both new and existing), falls in retail sales or increases in the unemployment rate may be less severe depending on a variety of factors. But if you consider that you're better off planning for a worst-case scenario and hoping for a better outcome, then of course you minimize your risk.

Secondly, the Orange County Register's Jeff Collins was there to report on the evening, and posted some of his thoughts on the Lansner on Real Estate blog:

Chris Thornberg, a former UCLA economics professor who co-founded Beacon, told homebuilders that while the overall economic outlook is bleak, hysteria about the U.S. marketplace is overblown. At worse, the financial picture is about as bad as the recession of 1982 and other severe recessions.

“2009 is going to be brutal. But it’s not that bad,” said Thornberg, who began predicting that a housing bubble was due to burst since at least 2003. “It’s not a depression. … This is sort of a normal, bad downturn.”

Other comments by Thornberg:

• Mortgage meltdown: The collapse of subprime loans was due to reliance on CDO (collateralized debt obligations, a.k.a., mortgage-backed securities). The entire financial market was based on folks making short-run returns. That’s got to be fixed.
• Liquidity crisis: It’s not a liquidity crisis, it’s just that lenders have no appetite for risk these days. “You can get business from the bank. You’ve just got to put skin in the game. … You can get money. You’ve just got to reduce their risk. That’s the new reality.”
• Wealth effect: People stopped saving because they thought they were rich because their stock values and home values had gone so high. They actually never were worth what people thought they were, and assets merely are collapsing “back to normal values,” he said. Americans “just woke up from a 14-year frat party with the mother of all Bud Lite hangovers.”
• Prop. 13: California isn’t a high-tax state. “It’s a dumb-tax state.” It places high income taxes on the wealthy who make up about 1 % of the tax base. The state instead should levy smaller tax hikes on a bigger tax base and it should eliminate Prop. 13, which is inequitable and limits revenues.

Click here for entire blog entry.