What I Saw Last Week

U.S. Existing Home Sales fell 1.8% in June to an annual rate of 5.52M units – I had forecast a drop to 5.58M units.

Existing sales

It is clear that high prices and limited supply crimped sales activity in June with the median existing home price for all housing types up 6.5% to $263,800 – a new peak price and the 64th straight month of year-over-year gains. The median existing single-family home price came in at $266,200, up 6.6% from a year ago.

Median home prices were up in all regions, yet only the Midwest saw an increase in existing home sales (+3.1%) in June. Sales dropped 2.6% in the Northeast, 4.7% in the South, and 0.8% in the West.

The inventory of homes for sale (1.96M) is 7.1% lower than the same period a year ago and has now fallen year-over-year for 25 consecutive months. Unsold inventory is at a 4.3-month supply at the current sales pace, versus 4.6 months a year ago and the 6 month supply typically associated with a balanced market.

First-time buyers represented 32% of sales in June, down from 33% in May and matching that seen a year ago.  All-cash sales were 18% of transactions in June, down from 22% a year ago and now at the lowest rate seen since June 2009.

The takeaway from the report is that neither the availability, nor the affordability, of homes is high, which is keeping sales activity from being all that it could otherwise be.

The Case Shiller Index rose by 5.7% year-over-year through May matching the annual rate seen the previous month – I had anticipated a more robust 6.2% increase.


Seattle, Portland, and Denver reported the highest year-over-year gains among the 20 cities. In May, Seattle led the way with a 13.3% year-over-year increase, followed by Portland at 8.9%, and Denver overtaking Dallas with a 7.9% increase. Nine of the 20 cities in the study reported greater price increases in the year ending May 2017 versus the year ending April 2017.

Home prices continue to climb and outpace both inflation and wages. Although housing is certainly not repeating the bubble period of 2000 through 2006 – as price increases vary across the country unlike the earlier period when rising prices were almost universal – the number of homes sold annually is 20% less today than in the pre-bubble period and the months’ supply is declining, not surging. The limited supply of homes for sale (only about four months’ worth given current demand) is the most palpable cause of rising prices. New home construction, higher than during the recession but still low, is another factor in rising prices.

For the last 19-months, Seattle or Portland have been the markets with the fastest rising home prices based on 12-month gains. Since the national index bottomed in February 2012, San Francisco has seen the largest gains. Using Census Bureau data for 2011 to 2015, it is possible to compare these three cities to national averages. The proportion of owner-occupied homes is lower than the national average in all three cities with San Francisco being the lowest at 36%, Seattle at 46%, and Portland at 52%. Nationally, the figure is 64%.

The key factor for the rise in home prices is population growth from 2010 to 2016: the national increase is 4.7%, but for these cities, it is 8.2% in San Francisco, 9.6% in Portland and a remarkable 15.7% in Seattle. It is clear that a larger population, combined with more people working, leads to higher home prices.

Consumer Confidence in July was measured at 121.1 – contradicting my forecast for a drop to 116.8 – from a downwardly revised 117.3 (from 118.9) in June.


The Present Situation Index increased from 143.9 to 147.8, which is a 16-year high, while the Expectations Index rose from 99.6 to 103.3.

Of note is that consumers’ outlook for the labor market improved. The proportion expecting more jobs in the months ahead was unchanged at 19.2%, but those anticipating fewer jobs decreased from 14.6% to 13.3%. Consumers, however, were not as upbeat about their income prospects as in June. The percentage of consumers expecting an improvement in their income declined moderately from 20.9% to 20%, while the proportion expecting a decline increased from 9.3% to 10%.

The takeaway from the report is that the uptick in July was forged by a rise in sentiment for current conditions, as well as the short-term outlook.

U.S. New Home Sales for June were at a seasonally adjusted annual rate of 610,000, exactly matching my forecast.

New sales

The June sales pace was 0.8% above the downwardly revised pace of 605,000 (from 610,000) for May but up 9.1% year-over-year.

New home sales were flat in the Northeast (after a 7.9% increase in May), up 10% in the Midwest (following a 19% decline in May), down 6.1% in the South (after a 6.8% increase for May), and up 12.5% in the West (notably on the heels of the 12% gain seen in May).

New home inventory also rose, with the number of homes for sale up 1.1% to 272,000 versus the number seen in June. This level is also 11.9% above the inventory level seen in June of 2016. As the pace of growth in the number of homes for sale exceeded the number that were sold, the months’ of supply also rose. When compared to June, the months’ supply increased by 1.9% to 5.4 months – 3.8% higher than one year ago. Nevertheless, the months’ supply (which measures the number of months it would take to exhaust the inventory at the current sales pace) remains below the healthy 6 month benchmark. Also of note is that homes priced under $400,000 accounted for 69% of new homes sold in June, unchanged from May but clearly indicating continued strength in the more affordable price points.

The key takeaway from the report is that sales activity was subdued month-over-month despite a 3.4% drop in the median sales price of $310,800. The average sales price, however, was up 4.2% to $379,500, which points to the affordability factor acting as a sales constraint.

As I had anticipated, the Federal Reserve decided not to raise the Fed Funds Rate – but I still stand by my opinion that they will raise rates one more time this year.

Following its two-day policy meeting, the Federal Open Market Committee released a statement that contained key language that points to a likely rate increase in September and, at that time, they will begin rolling off the $4.5T portfolio of bonds it has accrued on its balance sheet (mostly from the years following the crisis and the Great Recession it generated).

Real US GDP in the second quarter was estimated to have increased at a seasonally adjusted annual rate of 2.6% (I had forecast 2.8%) following a downwardly revised 1.2% increase (from 1.4%) for the first quarter.


The largest contributors to the increase in Q-2 GDP were personal consumption expenditures (+1.93%), gross private domestic investment (+0.34%), and net exports (+0.18%).

Government spending added 0.12%, with federal spending contributing 0.15% and state and local spending subtracting 0.02%. Defense spending, which contributed 0.20%, accounted for the entirety of the positive contribution from federal spending.

In conjunction with the Q-2 GDP report, the BEA released annual benchmark revisions for 2014 through the first quarter of 2017. With the revisions, it was said that real GDP from 2013 to 2016 increased at an average annual rate of 2.3% versus 2.2% with the previously published estimates. From the fourth quarter of 2013 to the first quarter of 2017, real GDP increased at an average annual rate of 2.1%, which was unchanged from previously published estimates.

The takeaway from the Q-2 GDP report, then, is that the average for the first half of 2017 was sub-par at 1.9%, which should continue to keep any concerns about the prospect of a near-term rate hike from the Fed under wraps.

The final Consumer Sentiment number for July came in at 93.4, up from the initial estimate of 93.1 but down from Junes reading of 95.1 – I had forecast no change.


The Current Economic Conditions Index edged up to 113.4 from the preliminary reading of 113.2, while the Index of Consumer Expectations increased to 80.5 from the preliminary reading of 80.2.

For perspective, the Index of Consumer Expectations stood at 90.3 in January which tells me that political partisanship continues to significantly influence consumers’ outlook.  That said, it would take a drop of another 10 points in the second half of 2017 for the downturn in the index to become more troublesome.

Despite the small decline, the takeaway from the report is that the Sentiment Index is still higher through the first seven months of 2017 than in any other year since 2004.

What to Watch for This Week

The NAR Pending Home Sales Index for May dropped 0.8% – look for a turnaround in the June numbers which should show a 1.1% increase.

Income & Spending is likely to continue its modest upward trend. Expect incomes to have risen by 0.3% in June with spending up by 0.1%.

U.S. Construction Spending was static on May and the June figure should be an improvement with total spending up by 0.5%.

Non-Farm Payrolls rose by 222,000 jobs in May and June will show the country having added an additional 181,000 positions.

With the increase in jobs, the Unemployment Rate is likely to drop back down to 4.3%.