What I Saw Last Week

Although I was hoping to see the NAHB Housing Market Index remain at 60 in January, sentiment turned sour and the Index dropped two points to 58.

HMI1

HMI2

The index touched a 10-year high in October, and averaged 59 throughout 2015; however, builders are clearly responding to recent consumer worries about the economy.

The sub-gauge that tracks current sales conditions dropped three points, settling at 65, but builder attitudes about sales over the next six months improved, rising one point to 65.

The gauge that tracks traffic fell to a nine-month low of 39, down five points during the month. I would also note that the traffic index hasn’t topped the neutral 50 marker since the height of the housing bubble a decade ago.

That said, if I consider the bigger picture, I think that the future is positive and I believe that builders see conditions coalescing in 2016. Historically low mortgage rates, steady job gains, improved household formations and significant pent up demand all point to a gradual upward trend for housing in the year ahead.

Housing Starts dropped by 3.8% in January – I had forecast an increase of 1.9%. Meanwhile Building Permits dropped by 0.2% – better than my forecast for a drop of 2.6%.

Permits

Single family starts dropped 3.9% and multifamily starts fell 3.7%. These are big numbers but I noted that there was an outsized 55.4% decline in total permits for the Northeast region, which was likely due to the expiration of tax credits for building multi-family properties in New York City. However, that decline was offset by a 26.5% increase for total permits in the Midwest and a 24.5% increase for total permits in the West. In all, a confusing picture.

The number of housing units under construction at the end of the period stood at 978,000 versus 976,000 at the end of December and the fourth quarter average of 962,000. This should be a slight positive as it relates to first quarter GDP computations.

The 3-month average for housing starts rose to 1.139 million from 1.130 million in December.

Inflation – as measured by the CPI – was unchanged in January as a 2.8% drop in the energy index was offset by increases across-the-board for all items less food and energy. I had forecast a drop of 0.1%. Core CPI, which excludes food and energy, increased 0.3% month-over-month. I had forecast an increase of 0.1%.

CPI

With the January readings, total CPI is up 1.4% year-over-year on an unadjusted basis while core CPI is up 2.2%. In fact, that is the highest 12-month change in core CPI since June 2012 and it exceeds the 1.9% average annualized increase over the last 10 years.

The Fed favors the PCE Price Index when discerning inflation trends, yet it will certainly view the CPI data as a marker of progress toward achieving its inflation target.

What to Watch for Next Week

Case Shiller numbers are released on Tuesday and I expect to see the 20-city market coming in at 5.8% y/y. The Seattle region should have risen by 10.6%.

The February Consumer Confidence number will be a disappointment. Look for a drop from 98.1 to 97.3.

U.S. Existing Home Sales in January are likely to have dropped from an annual rate of 5.46M units to 5.3M units on the back of inventory constraints.

The second estimate for GDP in the fourth quarter of 2015 will show that we expanded by 0.4% – down from the initial 0.7% rate.

Personal Incomes in January should have risen by 0.4% while Personal Spending is expected to rise by 0.3%.

 

The final Consumer Sentiment figure for February will likely fall from 92.0 to 91.0.