The Independent Market Observer

Monday Update: Housing Continues to Shine

Posted by Sam Millette

This entry was posted on Oct 26, 2020 11:33:07 AM

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In his Monday Update, Commonwealth’s Sam Millette analyzes growth in the housing sector and looks ahead to updates touching on wide swaths of the economy.Last week was relatively quiet on the economic update front, with a major focus on the housing market. Home builder sentiment and new home construction continued to show solid growth, supported by low mortgage rates and strong sales. This week will be jam-packed with updates touching on wide swaths of the economy.

Last Week’s News

We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for October. This measure of home builder confidence increased by more than expected during the month, rising from 83 in September to 85 in October, against calls to remain unchanged. This gain brought the index to a new record high, breaking the previous high set in September. Home builder confidence has rebounded notably since reopening efforts took hold, aided by record low mortgage rates that have driven additional prospective home buyers into the market. Confidence was further supported by falling timber prices during the month. Previously, the pace of new home sales hit its highest level in 14 years in August. Historically, higher levels of home builder confidence have supported faster building of new homes, so this report bodes well for October’s new home construction reports.

On Tuesday, September’s building permits and housing starts reports were released. Both these measures of new home construction showed steady growth during the month. Building permits increased by 5.2 percent and housing starts rose by 1.9 percent. The forecast for starts was a 3.5 percent gain, but permits were expected to go up by only 3 percent. Despite the modest disappointment for starts, the underlying data showed that September was a strong month for new home construction, as the pace of single-family housing starts hit its highest level in 13 years. Both housing starts and building permits have improved markedly since hitting a pandemic-induced low in April. Since then, rising home builder confidence, falling mortgage rates, and limited supply have encouraged builders.

Thursday saw the release of the weekly initial jobless claims report for the week ending October 17. The report showed that 787,00 Americans filed for initial unemployment benefits during the week, a result down from 842,000 initial claims the week before and better than economist estimates for 870,000. Continuing unemployment claims, which are reported with a one-week lag to initial claims, also declined unexpectedly, falling from 9.397 million to 8.373 million, against forecasts for 9.625 millions claims. Despite these results, both initial and continuing claims remain very high on a historical level. There are signs that the decline in continuing unemployment claims is largely being driven by claimants exhausting their unemployment benefits rather than finding new jobs. Ultimately, this report shows the continued stress on the labor market months after lockdowns ended and reopening efforts took hold.

We finished the week with Thursday’s release of September’s existing home sales report. Existing home sales grew by more than expected during the month, increasing by 9.4 percent against calls for 5 percent growth. Existing home sales have already easily surpassed pre-pandemic levels, as low mortgage rates and a shifting home buyer preference for more space have driven their pace to a 14-year high. Looking forward, low inventory and rising prices may start to serve as a headwind for faster sales growth. Inventory is down nearly 20 percent year-over-year, while prices are up nearly 15 percent. With that being said, the housing market remains one of the bright spots in the current economic recovery. The releases last week continued to highlight the impressive strength we’ve seen in this important sector.

What to Look Forward To

On Monday, September’s new home sales report was released. The pace of new home sales declined by 3.5 percent during the month, from an annualized rate of 994,000 in August to 959,000 in September, against estimates for an increase to 1.03 million. Despite the modest decline, the pace of new home sales is up more than 33 percent year-over-year and remains well above pre-pandemic levels. The September slowdown in sales was likely due in large part to low inventory, as the level of available homes for sale remains near record lows. New home sales are a smaller and often more volatile portion of the overall market compared with existing home sales. Accordingly, the modest pullback is nothing to worry about, especially given the strong rebound in overall housing sales seen since reopening efforts took hold.

On Tuesday, September’s durable goods orders report is set to be released. Durable goods orders are expected to rise by 0.6 percent during the month, following a 0.5 percent increase in August. Core durable goods, which strip out the impact of volatile transportation orders, are set to rise by 0.3 percent. Core durable goods are often used as a proxy for business investment, so continued growth here would be a positive sign for business investment during the quarter. But although durable goods orders have recovered since reopening efforts took hold, work remains to be done to get back to pre-pandemic levels. The overall level of orders was down more than 5 percent in August compared with February. If estimates hold, this report would signal that business investment during the quarter was a net positive for overall third-quarter economic growth.

Tuesday will also see the release of the Conference Board Consumer Confidence Index for October. This widely followed measure of consumer confidence is expected to remain unchanged during the month, staying flat at 101.8. The index saw its largest increase in 17 years in September, so a flat month in October would be understandable. Historically, improving consumer confidence levels support faster spending growth, so any improvement here would certainly be welcome. Still, despite the rebound in confidence we’ve seen since reopening efforts kicked off, we have a long way to go to get confidence back to the pre-pandemic high of 132.6 recorded in February.

On Thursday, we’ll receive our first look at third-quarter GDP growth. Economists are forecasting a 32 percent annualized increase in economic output during the quarter, following a 31.4 percent annualized decline in the second quarter. Rising personal consumption is expected to be the major driver of this growth. Predictions are for consumption to rise by 38.9 percent on an annualized basis, after declining by 33.2 percent in the second quarter. Business investment and government spending are expected to contribute to economic growth, while foreign trade should serve as a minor headwind. While a rebound in economic activity would certainly be welcome, it’s important to note that this report looks backward. The anticipated growth in the third quarter would not be enough to offset the declines in activity seen in the second quarter.

Thursday will also see the release of the weekly initial jobless claims report for the week ending October 24. Economists expect to see an additional 788,000 initial unemployment claims filed during the week, which would be a slight increase from the 787,000 initial claims recorded the week before. After peaking in late March, the pace of layoffs has shown signs of improvement over the course of the pandemic, but, nonetheless, claims remain stubbornly high. Given the continued high level of weekly claims and the slowing pace of new job creation, we could see a drop in overall employment in October, which would mark the first monthly decline since April. With the labor market lagging other sectors in the recent recovery, these weekly releases will continue to be closely monitored by economists.

Friday will see the release of September’s personal income and personal spending reports. Personal spending is expected to rise by 1 percent during the month, following a 1 percent increase in August. Previously released retail sales data for September showed surprising strength in spending on goods, which should offset weak spending on services. Incomes are expected to rise by 0.3 percent during the month, following a 2.7 percent decline in August. Personal incomes have been very volatile throughout the pandemic, driven in large part by shifting government stimulus and unemployment benefit payments. Overall, if estimates hold, this update would be a solid confirmation of the resilience of consumer spending in September.

Finally, we’ll finish the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey. The preliminary estimate released earlier in the month showed the index rising by more than expected, from 80.4 in September to 81.2 in October, against calls for a move to 80.4. Economists expect the index to remain unchanged from the preliminary estimate, which would mark the third straight month with increased confidence. Nonetheless, despite expectations for the index to stay at a seven-month high in October, it will be far from the high of 101 hit in February. This fact highlights the work that needs to be done to get consumer sentiment back to pre-pandemic levels.

That’s it for this week—thanks for reading and stay safe!

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