Housing Price Growth Improves

The housing market has recovered in the past few months. In line with this, we’ve seen an uptick in price growth. That makes sense because demand is high and rates are coming down. If rates were to spike, we’d see a decline in price growth. But obviously the reverse is occurring as the 10-year yield and the 30-year yield are at record lows. 

December 20 city seasonally adjusted Case Shiller index showed 0.4% monthly price growth, while the non-seasonally adjusted growth rate was flat. The former was expected to grow 0.5% which was also the prior growth rate. On a yearly basis, the non-seasonally adjusted growth rate was 2.9% which beat estimates by a tenth and improved from 2.6%.

The chart below shows the yearly growth in average national prices. Growth improved from 3.5% to 3.8%. Growth bottomed in August of last year at 3.1%. Phoenix had the highest growth rate again as it rose from 5.9% to 6.5% which was its highest rate since February. 

San Francisco price growth increased sharply from 0.5% to 2%. Chicago had the joint lowest price growth as it rose from 0.3% to 1%; New York price growth fell from 0.9% to 1%. Charlotte had the 2nd highest price growth as it increased from 5.2% to 5.3%.

The FHFA price index showed similar improvements. Monthly growth improved from 0.3% to 0.6% which doubled the consensus estimate. Yearly growth rose from 5% to 5.2%. Higher price growth motivates builders to start new homes. The housing market is starting an entirely new cycle of growth which supports the point that a recession isn’t around the corner. New home sales lead the economy by the most out of the leading indicators.

A Weak Manufacturing Index

Unlike the first 3 regional Fed manufacturing indexes, the Richmond Fed report showed a big decline. The current conditions index fell from 20 to -2. That missed estimates for 13 and the low end of the estimate range which was 5. We don’t know why this reading fell because there isn’t a comment section in this report. It’s certainly possible the coronavirus played a role in the weakness. Specifically, the shipments index fell from 29 to 1. The volume of new orders index fell from 13 to -10. The backlog index fell from 9 to -6. Local business conditions and capex fell from 16 and 15 to 6 (for both).

There wasn’t as much weakness in expectations. There isn’t an expectations index, but many of the individual readings improved. Weakness was mainly in shipments and capacity to utilization. Shipments index fell 13 points to 26 and the volume of new orders index was up 3 points to 40. Expectations for capex and local business conditions rose 14 and 3 points to 19 and 17.

Overall, this report was weak, but the silver lining is the improvement in expectations. It seems like it was impacted by the coronavirus, but maybe this is normal volatility. Even though the Richmond Fed’s reading was negative, the model of regional Fed indexes still expects the manufacturing ISM PMI to rise to 54.3. That's above the consensus of 51. It seems like the market is ignoring good news at the moment. But at least the ISM manufacturing report next week won’t cause stocks to fall.

MBA Applications Improve Amidst Lower Rates

MBA applications index was up 1.5% in the week of February 21st. The refinance index was down 1.5% after falling 8% in the prior week. You’d think low rates would cause stronger growth. When rates hit a new record low in March, expect many more refinances. The purchase index was up 6% weekly after falling 3% in the prior week. 

On a yearly basis, it was up 10%. It’s clear the housing market is one fire. I’ve seen some bears claim that the housing market won’t be the center of the next recession which means there can be a recession without weakness in housing. That’s wrong because housing is a significant part of the economy. I agree that it won’t cause the next recession, but it still will be weak when there is one. There would need to be a very minor recession for housing to not weaken during it.

New Cycle High In New Home Sales

January's new home sales report was fantastic. December report was revised from 694,000 to 708,000. In January, new home sales were 764,000 which beat estimates for 710,000 and the highest estimate which was 727,000. As you can see from the chart below, this was a new cycle high. It was the highest total since July 2007. 

New home sales won’t hit a record high this cycle because people are buying houses they can afford. A gap between new and existing home sales has been closing. Because existing home inventory is low, I expect new home sales to continue to close that gap. That assumes that new homes being built are towards the low end of the market as existing home sales are cheaper on average.

The bottom chart shows the average 30-year fixed rate of 3.51% is causing new home buying to increase. In the following 3 weeks since then, rates have fallen to 3.45%, 3.47%, and 3.49%. I have no doubt that when rates are updated on Thursday, the average will be below those levels. This spring we will see a new record low in rates since that’s what we’ve seen in the treasury market.

Conclusion

The housing market is on fire. We have growth in new home sales, purchase applications, and home prices. Housing starts should be strong in the first half of 2020. This will be a source of strength for the economy as business investment might suffer in Q1 because of the coronavirus. I don’t think the virus will hurt consumption growth, but judging from the January retail sales report, consumption growth will only be okay in Q1. We will get more details when the PCE report comes out this Friday.