What I Saw Last Week

The Federal Reserve released its Q1-2017 Financial Accounts of the U.S. report and there were some really interesting data points that relate to housing.  The report showed the value of residential real estate in the country totaling $34.5 trillion in Q1 – up by almost 1.6 trillion from a year ago and 3.7% above its pre-recession peak.

Ddebt & Equity

Of equal, if not greater, interest to me is that homeowner equity in the quarter rose by $1.3 trillion to now stand at $13.7 trillion.

U.S. Retail Sales dropped 0.3% in May (I had forecast an increase of 0.1%) and retail sales, excluding autos, dropping by 0.3% (I had forecast an increase of 0.2%).

Retail Sales

Core retail sales – which exclude auto sales, gasoline station, building materials, and food services sales – were basically flat versus April.  A drop in electronics and appliance store (-2.8%), gasoline station (-2.4%), and motor vehicle (-0.2%) sales were key drags on overall sales, yet there wasn’t much strength seen in general.

Non-store retailers (+0.8%) were the notable exception in terms of sales strength. Clothing and clothing accessories stores sales rose by 0.3%.

The takeaway from this report is that consumers clearly remain guarded with their discretionary spending activity, which is likely the result of seeing little, if any, wage growth.

Inflation, as measured by the Consumer Price Index, declined 0.1% in May (I had forecast no change) while the core rate, which excludes food and energy, was up 0.1% (I had forecast a rise of 0.2%).


For the 12 months ending May, total CPI on an unadjusted basis was up 1.9%, versus 2.2% for the 12-months ending April, while core CPI was up 1.7% versus 1.9% for the 12-months ending April.

Total CPI was driven lower in May by a 2.7% decline in the energy index, which was led by a 6.4% decline in the gasoline index. The food index was up 0.2%. The increase in core CPI was paced by a 0.2% jump in the shelter index, but notably, declines were registered for many other indexes, including apparel (-0.8%) and medical care services (-0.1%).

The takeaway from this report is that it shows a softening trend in consumer inflation which should, presumably, be some cause for concern among Fed members.

As anticipated, the Federal Reserve raised its benchmark interest rate by 0.25% to a range of 1.0% – 1.25%. This was somewhat more interesting given the data shown above which shows inflation still running well below target.

The central bank now believes inflation will fall well short of its 2% target this year. The post-meeting statement said inflation “has declined recently” even as household spending has “picked up in recent months,” the latter an upgrade from the May statement that said spending had “rose only modestly.” The statement also noted that inflation in the next 12 months “is expected to remain somewhat below 2% in the near term” but to stabilize.  The likelihood of one more rate increase this year just dropped.

The NAHB Housing Market Index weakened slightly in June as it dropped two points to 67 from a downwardly revised May reading of 69.  I had expected to see it drop just one point.


All three HMI components posted losses in June but still remain at healthy levels. The components gauging current sales conditions fell two points to 73 while the index charting sales expectations in the next six months dropped two points to 76. Meanwhile, the component measuring buyer traffic also moved down two points to 49.

Builder confidence levels have remained consistently sound this year, reflecting the ongoing gradual recovery of the housing market. However, even as the housing market strengthens and more buyers enter the market, builders continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family market.

U.S. Building Permits defied my expectations and dropped 4.9% to an annual rate of 1.168M units.  I had forecast an increase to 1.250M.


Permits for single-family units declined 1.9% as compared to April to an annual rate of 779,000 – the third straight month of declining permit activity suggesting single-family homebuilding may remain weak in the coming months.

The takeaway from the report relates to the continued decline in single-family permits, which means further supply shortages and affordability constraints are likely to persist in the new home market.

U.S. Housing Starts rose at an annualized rate of 1.092M in May – well below my forecast for an increase to 1.227M units. The number was down 5.5% from the revised April rate of 1.156M. On a year-over-year basis, housing starts were down 2.4%.


The overall decline in starts was paced by a 9.8% drop in multifamily units. Single-family starts declined 3.9% after ticking up 0.4% in April.  Single-family starts jumped 12.5% in the Northeast, rose 9.5% in the Midwest, declined 8.9% in the South, and fell 4.9% in the West.

The total number of units under construction at the end of the period declined 0.7% to 1.067M. I would note that 57% of homes under construction in May were multifamily (612,000) with the multifamily count almost 6% higher than a year ago (although in recent months this total has flattened). There were 455,000 single-family units under construction, a gain of 6% from this time in 2016 which is slightly lower than the April total (457,000) – a post-recession high.

The preliminary reading of the University of Michigan Consumer Sentiment Index for June declined to 94.5 from May’s final reading of 97.1 – I had forecast a drop to 97.0.

The Current Economic Conditions Index fell to 109.6 from 111.7 in May and the Index of Consumer Expectations slipped to 84.7 from 87.7 in May.


Interestingly, only a handful of respondents identified the James Comey congressional testimony as a factor in their outlook, meaning specific political concerns did not play a significant role in the modest dimming of the outlook. However, there is growing evidence that continued political bickering has taken a toll on sentiment across the political spectrum. Declines were observed across all political parties with self-identified independents reporting an 11.5-point decline in sentiment while Republicans (-9.2) and Democrats (-6.8) reported smaller declines.

What to Watch for This Week

U.S. Existing Home Sales in April were running at an annual rate of 5.57M units.  I think that we will see a small pullback when the May figures are released on Wednesday.  Look for a figure of around 5.52M units.

The FHFA Housing Price Index gauges the value of US housing and I am looking for a monthly increase of 0.4% after the 0.6% increase seen in March.

U.S. New Home Sales were running at an annual rate of 569,000 units in April and I am hopeful that the May figure will be an improvement.  Look for sales to be running at an annual rate of 599,000 units.