Monday Update: Housing Steady, Fed Eyes December

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 26, 2016 4:19:03 PM

and tagged In the News

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Monday UpdateLast week’s data focused on housing, including the National Association of Home Builders industry survey on Monday, housing starts on Tuesday, and sales of existing homes on Thursday. And of course, there was one very important event: the meeting of the Federal Open Market Committee.

A look at last week’s news

Disappointing data, but housing market still looks good. The NAHB survey showed a surprising increase to 65, well above expectations of 60. Although consumers may not be getting more confident, builders clearly expect great things, as the index is at its highest level since October 2005. All components rose, and confidence improved across the country.

Nonetheless, housing starts dropped to 1.14 million, down from 1.2 million and below expectations of 1.19 million. On a more positive note, the prior two months were revised up by 10,000 units, and the 12-month average rose to the highest level since 2008. The decline was concentrated in the South, while the other three regions showed gains, indicating that Hurricane Hermine had a negative effect. Overall, though the number was disappointing, it could have been a good deal worse and doesn’t change the picture of an improving housing market.

The same can be said for existing home sales, which dropped slightly, from 5.39 million to 5.33 million. Inventory is very low, which constrains sales, and the same weather issues were in play, so this drop doesn't seem to be a sign of a weak market either.

Fed news pleases markets. The big story last week was the September meeting of the Federal Reserve. As expected, the Fed kept interest rates unchanged, but internal pressure for a rate increase seems to be building. Three dissenters voted for a rate hike, unusual for the Yellen Fed, and 14 of 17 members apparently favor one by year-end. December looks quite likely, but projections for future rate increases were dialed back, and markets reacted positively.

The week ahead

We’ll see a range of data this week. New home sales, released Monday, dropped back to 609,000 after a July surge to 654,000 but still beat expectations of 600,000. Inventory constraints were a factor in the decline, with the number of new homes for sale dropping by the largest monthly amount in more than six years. Inventory continues to tighten, which should support further price gains. 

On Tuesday, the Conference Board’s Consumer Confidence Index is expected to pull back slightly after a surprise increase the previous month, from 101.1 to 98.5, a still-healthy level. The usual factors that support confidence are doing well, with jobs continuing to grow and gas prices edging up but still low. The last reading of the University of Michigan consumer sentiment index stayed flat, however, suggesting some weakness is quite possible.

Wednesday, we’ll get a look at the industrial sector with the durable goods orders report. Headline orders, which include transportation, are expected to swing from a gain of 4.4 percent to a decline of 1 percent on a drop in aircraft orders. Core orders are also expected to move downward, from a gain of 1.5 percent to a decline of 0.5 percent, on last month’s drop in manufacturing output.

Finally, and most important, the personal income and spending report on Friday will offer insight into what consumers are actually doing. Personal income growth is expected to slow from 0.4 percent to 0.2 percent, as is personal spending growth, from 0.3 percent to 0.2 percent. Although healthy, these growth levels could suggest that the recent acceleration was short lived.

Have a great week!

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