The Independent Market Observer

Monday Update: Housing Continues to Grow

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 25, 2016 12:50:02 PM

and tagged In the News

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monday updateLast week’s data came in above expectations, marking the fourth straight week of good news on the economy. Housing starts and sales grew and the industry remained confident, despite some signs of stabilization in the sector.

Last week’s data

Home builders feel good . . . The National Association of Home Builders Housing Market Index (HMI) came in slightly below expectations at 59, down from 60 in June, but remains at its 2016 average. Since mid-2014, the HMI has been above the breakeven level of 50, which indicates continued steady growth.

 . . . and continue to build. Housing starts rebounded substantially to a gain of 1.189 million at an annual rate, well above the previous month’s gain of 1.164 million and above expectations of 1.17 million. Previous months were revised down slightly. Building permits also increased by 1.5 percent, to a 1.153 million annual rate, in line with expectations.

Although these are reasonably strong numbers, starts were down by 2 percent on a year-to-year basis, while permits were down 13.6 percent—the weakest result since 2011suggesting the housing market continues to grow but may be starting to stabilize.

Buyers keep spending. Sales of existing homes gained in June for the fourth straight month, by 1.1 percent, to a 5.57 million annual rate, the highest since early 2007. Following healthy gains in April and May, sales were above both the 5.53 million of the previous month and expectations of 5.50 million.

The week ahead

Last week was all about housing, but this week will give us a broader look at the economy.

The Conference Board’s Consumer Confidence Survey will be released on Tuesday. Confidence is expected to decline from 98.0 to 95.5, based on the earlier decline in the University of Michigan survey and expected damage from the turmoil around Britain’s vote to exit the European Union. There is upside risk here, though, as U.S. markets have since rallied to new highs and employment continues to grow.

Also on Tuesday, we’ll see the final monthly housing report, for new home sales. Sales are expected to rise from 551,000 to 560,000, which would keep them at their highest level since mid-2007. In light of the last week’s housing data, this would point to a steadily improving housing market and reduce the stabilization risks mentioned above.

On Wednesday, data on durable goods orders will show whether the industrial sector continues to stabilize. Headline orders are expected to decline by 1 percent—not good, but better than the previous month’s decline of 2.3 percent. There is downside risk here, as aircraft orders may have dropped, but this series is very volatile due to the aircraft component, and such a decline would not be a cause for serious concern.

The core orders index, which excludes transportation and is a more reliable indicator, is expected to do better than the headline index, swinging from a decline of 0.3 percent to a gain of 0.3 percent, suggesting that the industrial sector does indeed continue to stabilize.

The regular meeting of the Federal Reserve will conclude on Wednesday. Expectations are for no action on interest rates, but markets will examine the Fed's statement for clues about how it views the U.S. and international economies in the aftermath of the Brexit vote.

Finally, the initial estimate for second-quarter economic growth will be released on Friday. GDP growth is expected to rise from 1.1 percent in the first quarter to 2.6 percent in the second, driven by the largest gains in consumption in the past decade and a small gain in exports over imports. Statisticians are also incorporating their annual revisions, which could push the first-quarter growth rate up and result in a second-quarter figure below expectations, so it will be important to consider both together.

Have a great week!

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