The Weekly Economic & Real Estate Forecast – 8/07/17 to 8/11/17

What I Saw Last Week

The NAR Pending Home Sales Index for June rose by 1.5% to 110.2 from an upwardly revised 108.6 (from 108.5) – I had forecast a 1.1% increase.

Pending Index

In June, only the Midwest saw a decline, with pending sales down 0.5% for the month and 3.4% for the year. Pending sales in the Northeast edged up 0.7% during June and are 2.9% higher compared to a year ago. In the South, pending sales rose 2.1% and stand 2.6% higher compared to last June. And in the West, sales rose 2.9% in June, but are 1.1% lower than a year ago.

The U.S. housing market is increasingly confronted with a shortage of properties listed for sale which can be attributed to a number of reasons. Investors that bought foreclosed houses during the downturn are now renting them at a tidy profit, while many existing homeowners say they cannot afford the down payment to sell their house and buy a more expensive property.  additionally, construction costs are holding many builders back from significantly adding to supply.

As a consequence, prices are climbing faster than wages while number of homes listed for sale has plunged. All of this limits just how much sales volumes can advance.

Income & Spending in June was a mixed bag with incomes unchanged but spending up by 0.1% (I had forecast incomes to have risen by 0.3% but spending exactly matched my forecast).

Income

A contraction in personal dividend income (-3.0%) and personal interest income (-1.0%) were key drags on total income in June. Their negative impact was offset to a large extent, however, by a 0.4% increase in wages and salaries.

Real disposable personal income was up 1.4% year-over-year (vs. 1.4% in May) while real PCE (Personal Consumption Expenditures) was up 2.4% (vs. 2.7%) in May.  The personal savings rate as a percentage of disposable income dipped to 3.8% from 3.9% in May as a result of flat income and a slight increase in spending.

The takeaway from the report is that the inflation data supported the market’s preconception that the Fed is unlikely to raise the target range for the fed funds rate at its September meeting.

U.S. Construction Spending declined 1.3% month-over-month in June (I had forecast +0.5%) after an upwardly revised 0.3% increase (from 0.0%) for May.

Con Spend

The June decline was driven by a 5.3% decrease in total public construction spending and a 0.1% decrease in total private construction spending.

On the public side, non-residential spending dropped 5.4%, with every component category seeing a decline in spending. Highway and street spending was down 6.6% while educational spending fell 5.5%.  On the private side, residential spending declined 0.2% with new multi-family spending down 2.9%. The decline in residential spending was offset slightly by a 0.1% increase in non-residential spending. Altogether, residential spending decreased 0.3% in June while non-residential spending fell 2.0%.

On a year-over-year basis, total construction spending is up just 1.6%, with public construction spending down 9.5% and private construction spending up 5.3%.

The takeaway from the report is that the 1.6% year-over-year growth rate in total construction spending is the second-lowest growth rate since 2011.

Non-Farm Payrolls continue to show a trend of strong job growth but lackluster wage growth remains an issue.

Payrolls

July non-farm payrolls rose by 209,000 (I Had forecast a more modest 181,000) with the average over the past 3-months coming in at a very respectable 195,000. Of note is the upward revisions to the June numbers (231,000 from 222,000) but the May figure was lowered to 145,000 from 152,000.

July private sector payrolls increased by 205,000 with the June figure revised to 194,000 from 187,000 and the May number revised to 153,000 from 159,000.

Monthly employment data, released by the BLS Establishment Survey, showed that construction employment rose by 6,000 over the month.

Residential construction employment is now at 2.7 million workers, broken down as 767,000 builders and 1.93 million residential specialty trade contractors. The 6-month moving average of job gains in residential construction is now was close to 3,000 a month and, over the past 12- months home builders and remodelers have added 118,300 jobs. Since the low point of industry employment following the Great Recession, residential construction has gained 717,200 positions but is still some time away from reaching full employment in the housing sector.

The key takeaway from the report is that it fit that sweet spot yet again for the stock market where job growth was strong but wage growth was not.  My assumption, therefore, is that the Fed will continue to wait on its next rate hike.

With the increase in jobs, the Unemployment Rate met my forecast and dropped back down to 4.3%.

U RAte

Persons unemployed for 27 weeks or more accounted for 25.9% of the unemployed versus 24.3% in June. The U-6 unemployment rate, which accounts for both unemployed and underemployed workers, held steady at 8.6% while the labor force participation rate increased to 62.9% in July from 62.8% in June.

What to Watch for This Week

Consumer Credit rose by $18.4B in May and I am expecting to see the June figure to pull back a little to $16.2B.

Inflation, as measured by the Consumer Price Index, has remained benign but we are likely to see a modest increase when the data is released on Friday.  Look for the total and core rates to have risen by 0.2%.

As a side note, I am heading out of the country for my annual kayaking adventure in Northern British Columbia this week.  As such, I am afraid that you won’t see another forecast until my return on August 21st!

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The Weekly Economic & Real Estate Forecast – 7/31/17 to 8/04/17

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.

CS

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.

Confidence

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.

GDP

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.

Sentiment

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%.

The Weekly Economic & Real Estate Forecast – 7/24/17 to 7/28/17

What I Saw Last Week

The NAHB Housing Market Index fell two points to 64 in July from a downwardly revised 66 for June (I had forecast no change) and the index now stands at its lowest level since November 2016.

HMI

Builders are increasingly concerned over rising material prices – especially lumber – and this is hurting affordability, therefore slowing the market.

Among the sub-indexes, the current sales conditions index fell two points to 70 and the index measuring prospective buyer traffic edged down one point to 48. Meanwhile, the sales expectations index fell two points to 73.

The NAHB noted that the current sales conditions index has been at 70 or above for eight straight months, indicating strong demand for new homes; however, given the latest lukewarm numbers, the association suggested that builders need to manage supply-side costs to keep home prices competitive.

The survey includes a set of “special” questions on a topic of current interest to the housing industry which is worthwhile discussing as the June special questions asked builders about the supply and price of developed lots.

The data suggested 64% of builders reported that the overall supply of developed lots in their areas was low to very low (the same share as seen in May 2016), but up from a cyclical low of 43% seen in September 2012. This is noteworthy as it represents the largest share of builders reporting low to very low lot supply since the NAHB began periodically asking the question in 1997.

The takeaway here is that the continued low supply of developed lots is a hindrance to a faster housing recovery.

U.S. Building Permits rose 7.4% to a seasonally adjusted annual rate of 1.254M units (I had forecast an increase to 1.196M) from an unrevised 1.168M in May. Additionally, the May figure was revised higher to 1.122M from 1.092M.

Permits

Single-family permits were up in all regions: Northeast (+11.5%); Midwest (+11.1%); South (+1.8%); and the West (+3.3%).

It is noticeable that permits are now at the highest level seen since March and that single-family permits rose 4.1% following 3 months of declines.

U.S. Housing Starts jumped 8.3% in June to a seasonally adjusted annual rate of 1.215M – I had forecast an increase to 1.160M units – after being revised up to 1.122M (from 1.092M) in May.

Starts

Single-family starts increased in all areas except for the Midwest (-3.6%). They were up 9.3% in the Northeast, up 7.2% in the South, and up a whopping 10.6% in the West.

The takeaway from this report is that there was solid growth in both single-family starts (+6.3%) and permits for single-family homes (+4.1%), both of which are important given the supply constraints in the housing market that have crimped affordability for many prospective home buyers.

What to Watch for This Week

U.S. Existing Home Sales rose 1.1% to an annual rate of 5.62M units in May. Unfortunately, I see supply constraints negatively impacting the June number – expect it to come in at around 5.58M units.

The Case Shiller Index rose 5.7% year-over-year through April and I anticipate the May number coming in up 6.2%.

Consumer Confidence in June was measured at 118.9 and the July figure is likely to show a drop back to 116.8.

U.S. New Home Sales were running at an annual rate of 610,000 units in May.  Look for the June number to match the prior month.

The Federal Reserve meets this week and I expect that they will decide not to raise the Fed Funds Rate at this meeting; however, I still anticipate one more rate increase this year.

On Friday, we get the first estimate of US GDP in the second quarter of the year.  I think that we will see growth in the quarter come in at 2.8% – up from the 1.4% seen in Q1.

The final Consumer Sentiment number for July should match the early month figure of 93.1.

The Weekly Economic & Real Estate Forecast – 7/17/17 to 7/21/17

What I Saw Last Week

Consumer Credit rose by $18.4B in May (I had forecast $12.7B) after increasing by an upwardly revised $12.9B (from $8.1B) in April.

Credit

The growth in May was driven by a double-dose expansion in non-revolving credit, which was up $11.1B from April to $2.824T, and revolving credit, which increased by $7.3B to $1.019T.

Consumer credit increased at a seasonally adjusted annual rate of 5.75% in May, with revolving credit increasing at an annual rate of 8.75% and non-revolving credit increasing at an annual rate of 4.75%.

Provided consumers weren’t making greater use of revolving credit lines to cover basic needs due to a shortfall in income, this report can ostensibly be looked upon as a good sign for the economy since the expansion of credit is an integral contributor to economic growth. It is hard to say, though, because there isn’t enough detail in the report and it tends to be subject to large revisions, which is why the market rarely shows much reaction to it.

U.S. Retail Sales declined 0.2% (I had forecast +0.1%) on the back of an upwardly revised 0.1% decline (from -0.3%) for May while core sales, excluding autos, fell 0.2% after an unrevised 0.3% decline for May.

Retail Sales

A 1.3% drop in gasoline station sales was the main drag on total retail sales along with a 0.6% decline in sales at food services and drinking places and a 0.4% decline in sales at food and beverage stores.

Building material, garden equipment and supplies dealers (+0.5%), general merchandise stores (+0.4%), and non-store retailers (+0.4%) were among the pockets of retail sales strength in June.

Core retail sales is the component that factors into the PCE goods component of the GDP report, so the takeaway from the retail sales data is that it points to weak spending on consumer goods in June and will be a negative input for Q2 GDP models.

Inflation, as measured by the Consumer Price Index, was unchanged in June, as I had forecast, while core CPI, which excludes food and energy, rose by 0.1%.

CPI

These monthly readings left CPI up 1.6% year-over-year, versus up 1.9% in May, and core CPI up 1.7% year-over-year, which was unchanged from the 12-month period ending in May.

The takeaway from this report is that the trend of disinflation for the Consumer Price Index, which began in March, remained intact and will force the Fed to take more time to determine if it ultimately flows through and undercuts the stable trend in core CPI.

Consumer Sentiment in early July came in at 93.1 – I had forecast it to have remained at 95.1.

Sentiment

The Current Economic Conditions Index climbed from 112.5 in June to 113.2 in July, matching the March 2017 peak for this index.

The Index of Consumer Expectations fell from 83.9 in June to 80.2 in July, which is ten points below its January 2017 peak.

It was noted in the report that the data does not suggest an impending recession, as much steeper declines in expectations typically precede an economic contraction.  The report also stipulated that the overall data indicates an annual gain of 2.4% in personal consumption in 2017.

The takeaway from the report is that it is fitting a pattern seen around past cyclical peaks, whereby the assessment of current conditions hits new peaks at the same time expectations start to post significant declines.

What to Watch for This Week

The NAHB Housing Market Index was measured at 67 in June and the July number is likely to stay at the prior month’s level.

U.S. Building Permits were running at an annual rate of 1.168M units in May.  The June figure should show a modest bump to 1.196M.

U.S. Housing Starts were measured at an annual rate of 1.092M in May and the June figure will be higher.  Look for 1.160M units.

The Weekly Economic & Real Estate Forecast – 7/10/17 to 7/14/17

What I Saw Last Week

US Construction Spending was basically flat in May (I had forecast a 0.3% increase) following an upwardly revised 0.7% decline (from -1.4%) in April.

Con Spend

Non-residential spending was up 0.3% month-over-month, so the drag in May was residential spending, which declined 0.5%.

Total private construction spending was down 0.6%, with declines in both residential spending (-0.6%) and non-residential spending (-0.7%). Despite the decline, private construction spending was up 6.2% year-over-year.

Total public construction spending jumped 2.1%, paced by a 1.9% increase in non-residential spending (which accounted for 98% of public construction spending). Non-residential spending made up the difference and increased 9.2% month-over-month. On a year-over-year basis, public construction spending was down 0.6%.

The takeaway from the report is that, with private residential spending down in May, housing market growth will continue to be pinched by limited supply.

U.S. Non-Farm Payrolls rose by 222,000 in June – well above my call for an increase of 173,000.

Payrolls

Over the past three months, job gains have averaged 194,000 per month as May payrolls were revised up to 152,000 from 138,000 and the April number was also revised higher to 207,000 from 174,000.

With payroll gains exceeded 200,000 in June, and upward revisions to payroll numbers for April and May, it would be natural to expect to see average hourly earnings increasing; however, this was not the case and failed to corroborate the Fed’s expectation that a tight labor market will ultimately produce stronger wage inflation.

June average hourly earnings increased 0.2% after increasing a downwardly revised 0.1% (from 0.2%) in May. Over the last 12 months, average hourly earnings have risen by just 2.5%, versus 2.4% for the 12-month period ending in May.

The takeaway from the report is that the weak year-over-year growth in average hourly earnings is likely to give the Fed some cause for pause when considering the timing of its next rate hike.

The June Unemployment Rate ticked back up to 4.4% – I had expected it to have remained at 4.3%.

U RAte

Notably, the U-6 unemployment rate, which accounts for both unemployed and underemployed workers, increased to 8.6% from 8.4% in May.

The takeaway here is that the increase in the unemployment rate was a function of more people (372,000) entering the labor force in search of work.

What to Watch for This Week

Consumer Credit rose by $8.1B in April and the May number should be higher with total credit increasing by $12.7B.

U.S. Retail Sales were a disappointment in May when they contracted by 0.3% as consumers remained guarded with their discretionary spending.  The June number should be modestly better and I anticipate a modest 0.1% increase.

Inflation, as measured by the Consumer Price Index, has been essentially benign and I expect this to continue as wage growth is clearly not apparent.  As such, it is likely that CPI will have remained static in June.

Consumer Sentiment ended June at an index level of 95.1.  The early July number is unlikely to have moved at all.

The Weekly Economic & Real Estate Forecast – 7/03/17 to 7/07/17

What I Saw Last Week

The Case Shiller Index data for April was released with few surprises with the 20-City index rising by 5.7% year over year – matching consensus forecasts.

Seattle, Portland, and Dallas reported the highest year-over-year gains among the 20 cities. In April, Seattle led the way with a 12.9% year-over-year price increase, followed by Portland with 9.3%, and Dallas with an 8.4% increase. Seven cities reported greater price increases in the year ending April 2017 versus the year ending March 2017.

CS

Before seasonal adjustment, the 10-City Composite posted a 0.8% increase and the 20-City Composite reported a 0.9% increase in April. After seasonal adjustment, the 10-City Composite posted a 0.2% month-over-month increase. The 20-City Composite posted a 0.3% month-over-month increase. Eighteen of 20 cities reported increases in April before seasonal adjustment; after seasonal adjustment, 13 cities saw prices rise.

As home prices continue rising faster than inflation, two questions are being asked: why? And, could this be a bubble?

Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up. The increase in real, or inflation-adjusted, home prices in the last three years shows that demand is rising. At the same time, the supply of homes for sale has barely kept pace with demand and the inventory of new or existing homes for sale shrunk down to only a four- month supply. Adding to price pressures, mortgage rates remain close to 4% and affordability is not a significant issue.

The question is not if home prices can climb without any limit; they can’t. Rather, will home price gains gently slow or will they crash and take the economy down with them? For the moment, conditions appear favorable for avoiding a crash. Housing starts are trending higher and rising prices may encourage some homeowners to sell. Moreover, mortgage default rates are low and household debt levels are manageable. Total mortgage debt outstanding is $14.4 trillion, about $400 billion below the record set in 2008. Any increase in mortgage interest rates would dampen demand; however, household finances would be able to weather a price drop should it come to it – which I doubt, at least in the foreseeable future.

Consumer Confidence in June rose to 118.9 from a downwardly revised 117.6 (from 117.9). I had forecast a drop to 116.7.

Confidence

Interestingly, the Present Situation Index rose from 140.6 to 146.3, which is close to a 16-year high while the Expectations Index dipped from 102.3 to 100.6.

The Conference Board’s report notes that consumers see the economy continuing to expand in the months ahead, yet they don’t foresee the pace of growth accelerating.

The key takeaway from the report is that consumer expectations for the short-term have been reined in some, but are still upbeat overall.

The NAR Pending Home Sales Index decreased for the third month in a row, and annually for the second year in a row. The PHSI, a forward-looking indicator based on signed contracts reported by the National Association of Realtors, dropped to 108.5 in May, down 0.8% from a downwardly revised 109.4 in April, and down 1.7% from the level seen a year ago. I had forecast an increase of 0.5%.

Pending Index

The PHSI remained flat in the Midwest, and decreased in the Northeast, South and West by 0.8%, 1.2% and 1.3% respectively. Year-over-year, the PHSI increased 3.1% in the Northeast, but fell 1.4% in the South, 2.8% in the Midwest and 4.5% in the West.

May existing sales increased 1.1%, despite two monthly declines in the PHSI. However, NAR reported a 7.2% year-over-year decline in sales of homes priced under $100,000 and only a 2.0% year-over-year sales increase in homes priced between $100,000 and $250,000. Meanwhile, sales jumped 26.0% for homes priced between $750,000 and one million dollars, while sales for homes at a million dollars and up increased 29.1%. The low inventory of homes for sale continues to dampen sales in the first two categories, but the sharp dichotomy suggests a more troubling picture regarding affordability.

The third and final estimate for US GDP in Q1 was upwardly revised from 1.2% to 1.4% – I had forecast it to have remained at 1.2%.

GDP

The rise in growth was a function of improved real final sales (which exclude the change in inventories) being revised up to 2.6% from 2.2% and personal consumption expenditures growth which was revised to 1.1% from 0.6%.

Additionally, export growth was revised up to 7.0% from 5.8%.

The key takeaway is that first quarter GDP growth was better than expected, but as the report from the BEA itself says, “…the general picture of economic growth remains the same,” which is to say it remains below potential.

I would also add that the economy saw little change amid a switchover from the Obama administration to the Trump White House – the U.S. grew 2.1% at the end of 2016. The U.S. has been growing close to 2% annually during most of the current eight-year-old recovery and is showing little sign that it’s about to rapidly speed up – or slow down!

Income & Spending in May were a bit of a mixed bag with incomes up 0.4% (I had forecast 0.3%) and spending exactly matching my forecast for a rise of 0.1%.

The personal savings rate as a percentage of disposable income rose from 5.1% to 5.5%, which is the highest rate since September 2016.

Income

Disposable personal income (income remaining after deducting personal income taxes) grew by 0.6% after accounting for inflation. It is noticeable that this is the largest monthly growth over the past two years. Disposable personal income ended up with a 2.2 % annual increase.

The takeaway is that inflation moved away from the Fed’s longer-run inflation target of 2.0%, not toward it as the Fed is anticipating. That will help solidify the market’s belief that the Fed doesn’t have enough data-based scope to raise the fed funds rate until perhaps its December meeting at the earliest.

The final take on Consumer Sentiment in June was revised from the preliminary reading of 94.5 to 95.1 – I had forecast a more modest rise to 94.7.

The Current Economic Conditions Index moved up to 112.5 from 109.6 in the preliminary reading. The final reading for this index for May was 111.7.

The Index of Consumer Expectations was revised down to 83.9 from 84.7 in the preliminary reading. The final reading for this index for May was 87.7.

Sentiment

The report notes that the data provide no indication of an imminent downturn nor does it offer any indication of a resurgent boom in spending.

The takeaway from the report is that consumer confidence has dipped to its lowest level since the election, yet it still remains at favorable levels as the average level of 96.8 for the first half of the year was the best half-year average since the second half of 2000.

What to Watch for This Week

U. S. Construction Spending dropped by 1.4% in April and the May number should indicate a bit of a turnaround with total spending up by 0.3%.

U.S. Non-Farm Payrolls rose by 138,000 in May and the June figure is likely to come in at around 173,000.

The June Unemployment Rate is likely to remain at 4.3%.

The Weekly Economic & Real Estate Forecast – 6/26/17 to 6/30/17

U.S. Existing Home Sales in May were at a seasonally adjusted annual rate of 5.62M units – I had forecast 5.52M – up 1.1% from a downwardly revised 5.56M (from 5.57M) in April and up 2.7% from a year ago.

Existing sales

Total housing inventory for sale rose 2.1% in May to 1.96M but that is still 8.4% lower than a year ago, marking the 24th consecutive year-over-year decline.

The median existing-home price for all housing types increased 5.8% to $252,800, which was the 63rd straight month of year-over-year gains and the highest median sales price on record. The median price for existing single-family homes rose 6.0% to $254,600.

Based on the May sales pace, the inventory of unsold homes is at a 4.2-month supply versus 4.7 months a year ago. A 6.0-month supply is typically associated with a more balanced market.

Existing home sales were up in every major region in May except the Midwest (-5.9%). Sales were up 6.8% in the Northeast, up 2.2% in the South, and up 3.4% in the West.

The median number of days a home was on the market fell to 27 days, down from 29 days in April and down from 32 days a year ago. That is the shortest timeframe since tracking for that metric began in May 2011.

The takeaway from the report remains the same: existing home sales are being impeded by a lack of affordable supply, particularly in the lower- and mid-market price ranges.

The FHFA Housing Price Index rose by 0.7% on April – I had forecast a more modest increase of 0.4% – and the previous month’s reported 0.6% increase was revised upward to reflect a 0.7% increase in home prices.

Existing sales

Over the year, the HPI shows that home sales prices have risen 6.8%. Broken down by U.S. Census Division, the Mountain region (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico) experienced the biggest annual jump in home prices, with a rise of 8.9% over April 2016. At No. 2 for largest 12-month price increases was the South Atlantic region, which experienced an 8% uptick over the year. This division includes Delaware, Maryland, the District of Columbia, Virginia, West Virginia, North Carolina, South Carolina, Georgia, and Florida.

Prices have steadily risen year-over-year in most Census divisions with the exception of the Pacific region, which includes Hawaii, Alaska, Washington, Oregon, and California. Home prices in this area rose 8.9% from 2015 to 2016 but just 7.5% from 2016 to 2017.

The takeaway here is that the compound annual growth rate since 1991 has been 3.5%; however, since January 2012, it has nearly doubled to an annual rate of 6.2%.

U.S. New Home Sales in May ran at a seasonally adjusted annual rate of 610,000 which was above my forecast for 599,000 units, up 2.9% from an upwardly revised 593,000 (from 569,000) in April and up 8.9% from the same period a year ago.

New sales

The median price of a new home sold surged 16.8% year-over-year to a record high of $345,800 and the average sales price rose by an equally impressive 16.1% to $406,400.

New homes priced at $399,999 or less accounted for 66% of the homes sold in May versus 70% in April, underscoring supply constraints at the lower end of the market.

The sales gains in May were not broad based. The Northeast and the Midwest saw single-family sales decline 10.8% and 25.8%, respectively, while the South and the West — the two largest regions for new home sales — saw single-family sales increase 6.2% and 13.3%, respectively.

The takeaway from the report is that affordability constraints driven by rising median prices are going to continue to serve as a headwind for first-time buyers who are facing added supply constraints in the existing home market.

What to Watch for This Week

Consumer Confidence in May slipped to 117.9 but remains close to a 10-year high. Expect to see the June figure drop a little further to 116.7 as consumers’ view of the short-term economic outlook downshifts a little more.

The NAR Pending Home Sales Index dropped by 1.3% in April and the June figure should be an improvement with pending sales rising by 0.5%.

The third and final estimate for US GDP in Q1 is likely to show no change from the previously reported growth rate of 1.2%.

Income & Spending both rose by 0.4% in April and the May number should show incomes up by 0.3% and spending up by just 0.1%.

The final take on Consumer Sentiment in June will show a slight increase from the previously reported figure of 94.5. Expect to see it come in at 94.7.

 

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