Home Price Growth - Housing To Hurt Q4 GDP Growth

It’s pretty obvious at this point that the housing market was terrible in November and December.

Prices were unaffordable especially in some cities in the West. The stock market was volatile, and the decline in interest rates didn’t start helping the housing market by then.

This housing market weakness should hurt Q4 GDP growth. 4 economic reports by the BEA have been rescheduled, but the GDP, Personal Income and Outlays, and the December U.S. International Trade in Goods and Services reports still don’t have a new release date.

Based on release dates for the data that was delayed, I wouldn’t be surprised to see the Q4 GDP report come out in March. The Atlanta Fed GDP tracker shows growth will be 2.7%. But it doesn’t have all the data it normally would at this point in the quarter.

It’s clear that if the government shuts down on February 15th again, the economic data will all be messed up. Delayed data that was supposed to come out at a later date will be delayed again.

Home Price Growth - Housing Price Growth Weakened Sharply In November

The November CoreLogic Case Shiller Home Price Index supports the thesis that the housing market was weak in November. Especially in the previously hot markets in the West.

On a seasonally adjusted basis, monthly price growth in the 20 city index was 0.4% which missed estimates and last month’s reading of 0.4% growth. Non-seasonally adjusted monthly growth was -0.1% which was below estimates for 0.2% and the previous reading of no growth.

As you can see from the chart below, yearly non-seasonally adjusted price growth was 4.68%. It missed estimates for 4.9% growth and 5% growth last month.

Home Price Growth - Recent price growth peaked in March 2018.

That will be the toughest comparison coming up. The price growth in November was the weakest since January 2015.

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I expect the 20 city housing price growth to stop cratering in January because of the strength in the MBA mortgage applications index.

However, that index has settled down in the past 2 weeks. So my confidence in a housing market rebound has waned. That being said, the more price growth falls, the better chance housing will rebound. The economy is still near full employment and real wage growth has been accelerating.

Housing prices don’t need to fall to be affordable if the labor market is still strong. Not all the millennials that were expected to move out, are doing so, but the ones with low student loan debt demand housing.

Home Price Growth - Specifics Of MBA & Case Shiller Index

The MBA Mortgage Applications index was very strong in the first 2 weeks of January. It was no surprise that the index showed negative growth in the week of January 17th because the comp was tough.

However, I thought the index would rebound in the latest report. Particularly because I thought demand was being boosted by lower price growth, lower interest rates, and less volatility in the stock market.

My thesis was partially dashed because the composite index fell 3% week over week in the week of January 25th. The purchase index fell 2% and the refinance index fell 6%. Furthermore, yearly unadjusted purchase applications went from increasing 13% to falling 7%.

Refinancing’s share of mortgage applications fell 2.5% to 42%. One important note is that the Martin Luther King Day Jr. holiday may have affected the results.

We need to wait until next week to see if that happened. Even though the index has fallen week over week in the past 2 weeks, purchase applications are about 6% above the long term average. The housing market definitely isn’t as weak now as it was in November.

Now let’s look at the specifics from the Case Shiller price index in November.

Home Price Growth - The hottest Western cities have led the cooldown. 

San Francisco and Seattle saw monthly prices fall 0.5% and 0.3%. LA and San Diego had no monthly price growth.

San Diego had 3.3% year over year price growth which made it one of the weakest cities in the 20 city index. Phoenix and Las Vegas were the hottest two cities in November as price growth was 0.7% and 0.5% monthly and 8.1% and 12.1% yearly.

The Northeast was weaker on a yearly basis as usual, but New York showed improvement monthly. New York’s prices have been up 0.9% and 0.7% in the past two months. They were up 3.5% yearly. Washington D.C. was the weakest as yearly price growth was only 2.7%. I wouldn’t be surprised if price growth fell in D.C. in the past 2 months given the 35-day government shutdown.

The chart below shows the Burns Home Value Index.

It’s a proprietary index that tells you which cities are overvalued if mortgage rates go up to 6%. It’s no surprise Las Vegas is 35% overvalued because its prices have been soaring. Since New York and Philadelphia haven’t seen as much price growth they are only overvalued by 12%.

Luckily for the cities listed below, interest rates are below 5%, so a correction caused by a recession shouldn’t cause this much carnage.

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Home Price Growth - Solid January ADP Report

I expect the January jobs report to be strong again. Estimates are for 160,000 private jobs created. The ADP report showed there were 213,000 jobs created.

As you can see from the chart below, this was the weakest report since November. The past 3 BLS reports have beaten the ADP survey. If the BLS beats the ADP report, it will be an amazing report which probably leads to high wage growth and higher stock prices if investors don’t fear inflation.

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The ADP report beat estimates for 174,000 jobs created. This report was about equally driven by small, medium, and large firms as they added 63,000, 84,000, and 66,000 jobs each.

The service sector dominated job gains even though the Markit PMI stated it weakened. Services added 145,000 jobs and goods-producing firms added 68,000 jobs. The professional and business industry added 46,000 jobs and the construction industry added 35,000 jobs.