What I Saw Last Week

Home prices in December showed the strongest gains since July 2014, capping an overall strong year for home-price growth driven by an improving economy and limited inventory of homes for sale. Case Shiller data showed the 20-city composite index up by 5.7% y/y (I had forecast 5.8%) and the Seattle area up by 9.9% – slightly below my call for an increase of 10.6%.

Case Shiller1 Case Shiller2

The hottest markets in the country, primarily on the West Coast, continued to show double-digit price gains, with Portland reporting an 11.4% year-over-year increase, followed by San Francisco with a 10.3% increase and Denver with a 10.2% jump.

I still anticipate that home-price growth will moderate in 2016, as buyers begin to reach the limits of what they can afford, especially in the most expensive markets.

Consumer Confidence dropped to 92.2 in February from a downwardly revised 97.8 (from 98.1) in January. I had anticipated a drop to 97.3.


February marked the lowest level for consumer confidence since October 2015. The drop in February stemmed from a drop in both the Present Situation Index (from 116.6 to 112.1) and the Expectations Index (from 85.3 to 78.9).

Notably, the report attributed the weakening in the present situation to greater apprehension about business conditions, their personal financial situation, and to a lesser degree, labor market prospects.

U.S. Existing Home Sales ran at a seasonally adjusted annual rate of 5.47 million units in January, up 0.4% from a downwardly revised 5.45 million (from 5.46 million) in December. I had expected to see a drop to 5.3M.

Existing home sales

Existing home sales2

Existing home sales3

Existing home sales are 11.0% higher than a year ago. At the current sales pace, there is a 4.0-month supply of inventory of unsold homes, which is well below the 6.0 month supply that is typically maintained during normal periods of buying and selling. The lack of supply has helped push median prices higher, which in turn is limiting sales activity since price increases are outpacing income gains for a large swath of potential buyers.

Overall, the median home price for all housing types in January was $213,800, up 8.2% year-over-year. By region, the median home price in the South was up 8.5% from a year ago, up 8.7% in the Midwest, up 7.4% in the West, and up 0.9% in the Northeast.

The slight improvement in existing home sales in January was surprising as I had expected to see low inventory levels, the winter blizzard in the Mid-Atlantic/Northeast late in the month, and a normal pullback from a much stronger than expected December home sales gain would have produced a modest downturn in sales.

New Home Sales in January were a disappointment with a drop to an annual rate of 494,000 units – this was 9.2% below the sales rate in December and well below forecast estimates for 523,000.

New Home Sales

New Home Sales2

The January downturn has all the appearances of being the result of a surprising drop off in demand. Other exogenous factors that could be blamed really can’t be. Firstly, the weather can’t be blamed as the culprit for a few reasons. First, the Northeast, which was struck by a blizzard late in the month, saw sales increase 3.4%. Secondly, the West, which did not have to contend with blizzard conditions, saw a huge 32.1% month-over-month decline in new home sales.

Additionally, pricing can’t be thought of as the culprit either. The median sales price of $278,800 was down 5.8% from the prior month and down 4.5% year-over-year.

This is all rather curious but I can’t say that a single data set is the be all and end all. Remember that new home sales are counted when the contract is signed versus existing home sales which are counted when the sale is closed. Additionally, sales are still in a relatively healthy range and so I am not overly concerned.

I should know more when we see the February number.

The US economy expanded by 1% in the fourth quarter of 2015 according to the second estimate for GDP  – I had forecast a drop to 0.4%.


While the upward revision to headline GDP growth is better than nothing – particularly as I had forecast a downward revision to 0.4% – the bottom line is that fourth-quarter GDP growth was still pretty modest.

Furthermore, the weaker drag from inventories in the fourth quarter means that any rebound in the first quarter could be slightly more modest than we previously expected.  Nevertheless, it still appears that first-quarter GDP growth is on track to rebound to a very healthy 2.5% annualized or higher, which should dampen any concerns about an imminent recession.

The Personal Income & Spending report for January produced a slate of good economic news. Income increased 0.5% month-over-month (my forecast +0.4%), spending increased 0.5% (my forecast +0.3%), and the core PCE Price Index, which excludes food and energy, increased 0.3%.

Income & Spending

This compendium of data leans in the Fed’s favor for rationalizing another rate hike. The pressing question is this: Might it be enough to prompt another rate increase at the March 15-16 FOMC meeting? Time will tell, yet there was some key support offered for the Fed’s inflation view and the notion that the Fed is making progress toward reaching its 2.0% inflation target (remember, progress toward, not actual achievement, is the guiding principle these days for the Fed).

The final Consumer Sentiment figure for February came in at 91.7 – down from 92.0. I had called for a drop to 91.0.

Consumer Sentiment

The Current Economic Conditions Index improved to 106.8 in February from 106.4. The Index of Consumer Expectations dipped to 81.9 from 82.7. The release noted that consumers are a little more cautious about year-ahead prospects for the economy, but that the outlook for their personal financial situation has improved to its best level in ten years.

The Sentiment Index is 6.5% below its cyclical peak of 98.1 in January 2015, which the report suggests hardly merits a recession warning. For added perspective, the Sentiment Index hit a cyclical peak of 96.9 in January 2007 and then declined 27% to 70.8 in February 2008.

What to Watch for This Week

US Pending Homes Sales in January are likely to have contracted by 1.5%. I am not overly concerned as I will put much of the contraction down to the severe January blizzard. That said, some of the contraction is likely a function of an acceleration in home prices.

Construction Spending in January will be modestly higher – look for an increase of 0.5%.

Non-Farm Payroll growth in February will be an improvement in the 151,000 jobs created in January. Look for the country to have added 190,000 new jobs

The US Unemployment Rate will remain at 4.9%