Housing Starts Unexpected Rise in July

08.18.2016 | Housing Starts Unexpected Rise in July – Rusty Tweed team

Housing starts ran higher than expected in July, growing at a seasonally adjusted 1.21 million annual rate, an increase of 2.1% from June’s upwardly-adjusted figure and the highest since February. Building activity increased generally supporting the notion that investment in residential construction will rebound following a slump in the second quarter.

However, permits for future construction went in the opposite direction, dipping slightly to a 1.15 million-unit annual rate last month. Economists who had been polled by Reuters had instead forecast housing starts dropping to a 1.18 million-unit pace last month and building permits increasing to a 1.16 million-unit rate.

Despite an expected continued rebound, the fact that permits are lagging behind housing starts, coupled with a tightened labor market, will likely slow growth.

Housing Starts Unexpectedly Rose in July - Rusty Tweed team

Multifamily Starts See a Healthy Rebound

Most of the strength in housing starts in July came from multifamily starts, which rose by 8.3% to a 433,000 annual rate. Single-family starts saw only a slight increase of 0.5% to a 770,000 annual pace. The multi-family segment of the market continues to be aided by robust demand for rental accommodation as a large section of Americans continue to shun homeownership in the aftermath of the housing market collapse.

Overall Assessment

While housing starts numbers remain lower than pre-recession levels, compared to this time last year, housing starts are 5.6% higher, and last month’s figure represented the second best of the recovery.

More houses were under construction last month than at any time prior to 2008, indicating homebuilders were making progress in filling orders.

“What we’re seeing is quite encouraging,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities in New York. “It suggests that the housing sector recovery is building on the strong momentum we’ve had in the past few months.”

However, for many buyers, prices remain too high to buy, partly as a result of higher demand for new and previously-owned housing and not fast enough growth of new construction. According to Marketwatch, many economists have argued for a growth in single-family houses, to help contribute to economic activity and as a show of good faith in a market of homes for purchase.

Earlier this week, the National Association of Home Builders reported that builder sentiment had slightly improved. However, a gap continues between builder confidence and the number of homes they start.

MFR Chief Economist Joshua Shapiro wrote, “Building permits and the NAHB Housing Market Index point to little underlying upward impetus in single family starts over the near term, while the message from new home sales, which for obvious reasons are the most important determinant of starts, is a more positive one, although starts have yet to respond to the latest leg up in sales.”

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7-Year High for New Home Sales

8.3.16 | 7 Year High for New Homes Sales – Rusty Tweed team

7 Year High for New Homes Sales - Rusty Tweed team

Demand Remains High for New Homes

Sales of new homes across the U.S. increased by 10% in the second quarter as prior month sales data were revised upward. Revisions to March, April and May data increased the sales tallies for those months by a total 22,000. The average pace across the second quarter, 576,000, is 10% more than the 524,000 for the first quarter.

Earlier this week, the Commerce Department reported that June sales rose by 3.5% to a seasonally adjusted rate of 592,000. This was above the economists’ prediction of 560,000 new units being sold a month. The median price of a new home is $306,700, 6% more than a year ago. New home sales are currently at their strongest since the recession hit in 2008.

The biggest surge in new home sales happened in the Midwest and West (the most significant surge since November 2007) seeing prices rise by over 10%. Both areas have seen a sharp rise in home prices within tight inventories. In the Northeast and South, sales actually dipped slightly. The Northeast saw sales fall by 5.6% whereas they only slipped by 0.3% in the populous South.

Barclays analyst Rob Martin wrote, “Despite some softness in prices reported earlier today, the housing market remains healthy. We expect housing to continue to firm, on average, over the medium term, with a buoyant household sector supporting both prices and volumes.”

New home purchases are only a tenth of all home sales; however, the data arrives amidst a host of other signs that growing numbers of Americans are buying homes. Strong job growth, slightly looser lending standards and historically low mortgage rates are all contributing to the surge in home purchases.

Rise in Confidence from Home Builders

Home builders are showing increasing amounts of confidence. Last week, PulteGroup (PHM) reported that it would be expanding its stock buyback program in the light of better-than-predicted earnings and revenue.

If builders do increase their construction this year, there are hopes this will help lift the wider economy. However, there are fears that mortgage rates will rise if the Federal Reserve raises a key interest rate, as is widely believed will happen later this year. The Fed, meanwhile, has indicated that any rate increases from the current near zero will be minimal and gradual. Economists believe that demographic shifts, including younger Americans starting families and continued growth in the labor market, will help the housing market overcome such obstacles.

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Knock-on Impact of Low Interest Rates

8.4.16 | Knock-on Impact of Low Interest Rates – Rusty Tweed team

Record Low Yields

The yield on 10-year U.S. Treasuries is at a record low of 1.36% (7/8/2016). Its previous record low was in July 2012 when investors were nervous that Spain needed a full-blown bailout. The recent slide in rates has led to lower prices for bonds and a record high rate of investors buying U.S. Treasuries.

Analysts at LPL Financial think investors will continue to flock to bonds because they “remain more attractively valued compared to their overseas counterparts in Germany and Japan”.

Impact of Low Interest Rates on U.S. Stocks

 U.S. stocks are close to their all-time highs. They suffered a hit immediately following Brexit, but have recovered quickly. Companies like Johnson & Johnson (JNJ) – up 20% this year; and Kimberley Clark (KMB) – up 10% his year – have high dividends. This suggests that investors who might normally purchase bonds are instead buying riskier stock in order to get a greater yield and return.

However, whenever U.S. interest rates rise, stocks could take a hit. In addition, a strong dollar impacts U.S. trade as goods made in the U.S. look more expensive on world markets.

Knock-on Impact of Low Interest Rates - Rusty Tweed team

Impact of Low Interest Rates on the Real Estate Market

Low interest rates stimulate the real estate sector by making it cheaper for individuals and businesses to borrow money to invest in real estate.

 Mortgage rates are tied to Federal Reserve interest rates. When rates are low, as they currently are, a homeowner will pay significantly less across the duration of his/her mortgage for the same priced home. Cheaper mortgages create an incentive for people to buy homes.

Since U.S. interest rates on bonds and CDs are so low, investors and retirement funds are buying increasing amounts of real estate in order to get the rental income, which is significantly higher than bonds or CDs. In turn, this is pushing up rental properties valuations.

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House Prices Grow by 5% Over 12 Month Period

7.27.2016 | House Prices Grow by 5% – Rusty Tweed team

House Prices Grow by 5% - Rusty Tweed team

House Prices Spike of 5.2% Over 12 Month Period

TheS&P CoreLogic Case-Shiller survey looks at U.S. house prices in 20 metropolitan areas nationwide. As a result, its home price indices are the leading measures of U.S. residential real estate nationally and in these 20 cities.

It reveals a 5.2% spike of house prices countrywide over a 12 month period. After seasonal adjustment, house prices nationwide dropped by 0.1% in May.

Portland saw the fastest growth in its house prices at 12.5% over the 12 month period, while New York and D.C. are among the weakest areas of the country. Eight cities had more rapid annual price appreciation in May than in April.

Shifting Regional Patterns in House Price Increases

Regional patterns are shifting, according to David Blitzer, managing director of the index committee at S&P Dow Jones Indices. Areas that were previously strong such as Los Angeles, San Diego and San Francisco are seeing more modest rises of 5.4%, 6.4% and 6.5% respectively. Meanwhile, prices in the Pacific Northwest boom. Seattle also saw a significant growth of 10.7% over the 12 month period. New York’s change across the same period was only 2% and Washington D.C. was not far in front with 2.4%.

The 20-city composite is up 40.4% from its lowest point in 2012. It is down 8.8% from its peak in 2006.

House Prices are Historically High Compared to Inflation

In the 12 months ending May, consumer prices increased by only 1%. The disproportionate growth of U.S. home prices to inflation is worth following closely. If the economy doesn’t improve at the same rate as house prices, prices will inevitably begin to decelerate, if not fall.

Robert Brusca, chief economist of FAO Economics, recently pointed out that the trend in house prices has been decelerating despite mortgage rates remaining at record lows. He says house prices look overvalued, therefore “it’s a great time to sell your house”. Brusca pointed out that in the Conference Board consumer confidence report published last Tuesday, expectations for interest rates and inflation declined.

Expectations for higher interest rates in 12 months’ time fell to a three-year low of 51.7% in July from 59.4% in June. The expectation for inflation in 12 months dropped to 4.7%, the lowest rate in more than nine years.

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