What I Saw Last Week

To my surprise, the National Association of Home Builders Market Index for February dropped from 47 to 46.  We are all aware that tight lending policies relative to mortgages remain an issue for builders; however there is now an extra kink in the pipe – namely a shortage of skilled labor – and this helped to push the index down.  Builders are seeing increasing hard costs in the form of labor as well as materials and this is effecting their bottom lines.

I am hearing from several clients that this is becoming an issue and, when I look at the data, I see that employment in the construction industry is still off by 29% in the Seattle metro are from its previous peak. I will be watching this closely as this could lead to higher wage demands which translate to higher asking prices.

As expected, Housing Starts dropped but by a little larger amount than I had expected,.  New starts dropped by 8.5% in January from an upwardly revised 973,000 (from 954,000) in December to 890,000 while Building Permit rose to 925,000 (SAAR) – above my forecast for it to rise to 918,000.

The drop in starts is more likely due to volatility than a shift in construction trends. The number of homes currently under construction, which factors into GDP, remained on a solid positive track, increasing 1.5% to 557,000. That was the 17th consecutive monthly increase and is 34.9% above the August 2011 trough.

Single-family construction increased 0.8% to 613,000 in January from 608,000 in December. That was the most single-family homes started since 615,000 single-family homes were started in July 2008.

Initial Unemployment Claims rose, as expected, to 368,000 – a little above my call for a rise to 358,000. The continuing claims level increased from an upwardly revised 3.137M for the week ending February 2 to 3.148M for the week ending February 9.

There has been no improvement in labor conditions over the past several months. Movements in jobless claims were the result of seasonal biases or one-time events — such poor weather conditions.

As expected, inflation – as measured by the Consumer Price Index – remained flat in January for the second consecutive month.  Excluding food and energy, core prices increased 0.3%. That was the largest increase in monthly core prices since increasing 0.3% in May 2011.

Energy prices fell 1.7% – its third consecutive monthly decline – as a result of seasonal adjustments.  Food prices did not increase and offset the decline in energy costs. (Food prices were flat in January after increasing 0.2% in December.)

There were no unusual outliers that caused core inflation levels to accelerate in January. Most of the sectors saw minor increases that, when added up, resulted in stronger-than-expected inflation growth. Core CPI will likely soften next month and return to the 0.1% to 0.2% monthly growth trend.

Existing Home Sales rose to 4.92M (SAAR) in January and in line with my expectations.

Pent up demand and a slowly improving labor market were expected to drive home sales higher throughout 2013. Yet, over the past three months, sales have averaged 4.93M units and are having trouble breaking the 5.00M threshold. While this bound is purely symbolic, it verifies the difficulty home sales are experiencing in gaining traction amid an overall economy strengthening economy.

I suspect, however, that the lack of sales growth over the past few months has more to do with low inventory levels.  Over the past three months, there have been on average only 4.5 months of supply at the current sales rate. In January, the amount of supply fell to 4.2 month, which is the lowest level since March 2005. The lack of variety of available homes may be turning off potential buyers and keeping them from making a purchase. Until more homes are put on the market, sales growth may remain stagnant.

Distressed sales continue to make up a smaller proportion of the overall market. Sales of these homes accounted for only 23% of all January sales. That is down from 24% in December and 35% in January 2012.

Since distressed properties sell for substantial amount less than a comparable non-distressed home, the lack of foreclosure and short-sales helped boost the median existing home prices 12.3% y-o-y to $173,600.


What to Watch for This Week

The Case Shiller Index jumped by 5.5% in December and I expect that the annual rate of growth will come in at 6.6%.  Seattle should exceed this figure by about 1.2%

I do like to compare the Case Shiller Index with the Federal Housing Finance Authority data on home sales.  They also release their December figures on Tuesday and I anticipate that annual growth – that was measured at 5.6% in November, will show 6% growth.

New Home Sales in January will likely rise from 369,000 (SAAR) to 380,000 (SAAR).

Consumer Confidence dropped like the proverbial rock in January and I am looking for a bit of a rebound here.  Expect a figure of around 62.0.

The Pending Home Sales Indexthat dropped by 4.3% in December will turnaround.  Look for it co come in at +1.0%.

Initial Unemployment Claims will hold steady at 360,000.

The second take on US growth – as measured by GDP – comes out on Thursday and I am looking for growth to be revised upward to 0.1% from the initial -0.1% reading.

Data on Personal Incomes and Spending will likely be mixed.  I am looking for incomes to contract by 2.4% while spending expands by 0.2%.

The final February figure for Consumer Sentiment will remain at 76.3.

Construction Spending should show an expansion of 0.5% from the 0.9% seen in December.