Monday Update: Housing Stays Hot, Consumer Confidence Jumps

Posted by Sam Millette

This entry was posted on Nov 25, 2019 11:18:07 AM

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In his Monday Update, Commonwealth’s Sam Millette discusses hot trends in housing, the FOMC minutes, and why we may see stronger consumer spending.Last week, the housing sector continued its recent rebound, as low interest rates and increasing consumer confidence helped deliver potential home buyers to the market. Despite the holiday, this week will be busy again. Tuesday and Wednesday are packed with economic updates as we head toward month-end.

Last week’s news

The week began with Monday’s release of the National Association of Home Builders Housing Market Index, which declined slightly from 71 in October to 70 in November. This drop breaks a four-month upward streak. Despite the modest pullback in November, home builder confidence still sits near post-recession highs, as cheap borrowing costs continue to drive an uptick in potential buyers. The portion of the index that focuses on future sales increased in November, indicating that home builders are more optimistic about the next six months for the housing market. Overall, while the decline this month was slightly disappointing, home builder confidence remains high, so there is no immediate cause for concern.

On Tuesday, with the release of October’s building permits and housing starts reports, we saw the positive impact from high home builder confidence levels. Housing starts grew by 3.8 percent during the month, rebounding from a larger-than-expected decline in September. Building permits also increased in October, growing by 5 percent, against expectations for a modest 0.4 percent decline. Each of these measures can be volatile on a month-to-month basis, but there’s been a clear upward trend this year in housing starts. Home builders are continuing to start construction, confident that new homes will sell.

Wednesday saw the release of the FOMC minutes from the October meeting. The committee voted to cut the federal funds rate by 25 bps, marking the third straight meeting with a rate cut. The minutes confirmed that most Fed members are comfortable leaving interest rates where they are for now, unless there is a major change to the economic outlook. Market participants appear to have taken the Fed at its word, with no further rate cuts priced into markets this year. The minutes also revealed a discussion on the recent Fed actions to calm volatility in the overnight repurchase agreement (repo) market. The possible creation of a permanent repo program for the overnight market was mentioned. No concrete steps were taken in this direction, although board members committed to monitoring and researching the impact of repo activities.

On Thursday, October’s existing home sales report was released. Sales of existing homes grew by 1.9 percent during the month, following a downwardly revised 2.5 percent decline in September. Despite September’s lull in sales, this marks the fourth straight month of year-over-year growth in existing home sales. Previously, they had declined year-over-year for 16 straight months. Low mortgage rates and high consumer confidence levels have helped drive additional buyers into the market. As a result, housing has become one of the bright spots in the current economic expansion.

Speaking of high consumer confidence levels, we finished out the week with the second and final reading of the University of Michigan consumer confidence survey for November. The index rose from 95.7 midmonth to 96.8 at month-end, against expectations for no change. This result was driven by improvements to both the current situation and future expectation portions of the index. With domestic equity markets at or near all-time highs for most of the month and evidence of a firming jobs market, it’s not surprising that consumer confidence remains high. That said, this better-than-expected result helps calm fears of a further decline in confidence, following a surprise drop to a three-year index low in August. Looking forward, improving consumer confidence should help support additional consumer spending as we enter the busy holiday season. 

What to look forward to

Tuesday will see the release of October’s new home sales report. It’s set to show a 0.8 percent increase for the month, following a 0.7 percent decline in September. New home sales represent a smaller and more volatile portion of total home sales than existing home sales. Nonetheless, a rebound like the one seen for existing home sales would be a positive signal for housing. As demonstrated last week, home builder confidence slipped slightly in November. A better-than-expected result for new home sales would likely go a long way in supporting further increases in home builder confidence.

Also on Tuesday, we’ll receive the Conference Board consumer confidence survey for November. Confidence is expected to increase modestly, from 125.9 in October to 126.8 in November. This anticipated increase would offset the decline we saw in October and put us above the 126.3 reading in September. Even with such an increase, however, this index sits well below its high-water marks of last year and earlier this summer. Improving confidence is a major driver of consumer spending growth, so an increase would certainly be positive. As with the University of Michigan survey, this result may lead to some stronger-than-expected consumer spending.

On Wednesday, the second estimate of third-quarter GDP growth is set to be released. The first estimate for the quarter came in at 1.9 percent on an annualized basis, and economists expect the second estimate to remain unchanged. Before release of the first estimate, economists had forecast a more modest 1.6 percent third-quarter growth rate, so the anticipated increase for the second estimate is encouraging. Personal consumption growth is expected to decrease slightly from 2.9 percent in the first reading to 2.8 percent in the second. This result would, however, still be higher than expectations of 2.6 percent growth prior to the first estimate. Overall, while growth appears to be slowing from the faster pace of the first half of the year, it’s still growth. As such, the anticipated results would be reassuring.

Wednesday will see the release of the October durable goods orders report. Durable goods are expected to decline by 0.5 percent for the month, following a decline of 1.2 percent in September. As was the case with September’s disappointing results, this release is expected to show the negative impact of the General Motors (GM) strike that was active for most of the month. Core orders, which strip out the impact of volatile transportation orders, are expected to make a modest 0.2 percent gain. An increase here in contrast to the decline in headline orders would indicate that business owners are willing to invest despite the headwinds from slowing global trade and the GM strike.

Finally, we’ll finish out the week with Wednesday’s release of October’s personal income and personal spending reports. Both measures are set to increase by 0.3 percent during the month. This would be in line with previously released retail sales data that showed healthy 0.3 percent growth for October. Income and spending continue to increase at similar rates, indicating that the consumer spending growth we’ve seen this year is well supported.

That’s it for this week—thanks for reading and have a great Thanksgiving!

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