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Housing on Weak Ground

Learning Opportunities

On the surface, most of the housing data released this week gives the impression all is well with the industry. A closer look into the reports reveals continued weakness due to rising prices and the impending trade tariffs. Construction of new homes surged 9.2 percent in August. The first increase in two months doesn't look as good when you realize most of the gain was due to a 29.3 percent rise in multi-family activity. Single-family home construction was up a mere 1.9 percent. To make matters worse, permits for single-family homes, a sign of future activity, fell 6.1 percent. Homebuilders remain optimistic, citing demand from millennials and other first-time buyers, but continue to struggle against rising material costs. And costs may only get worse. The latest round of announced trade tariffs includes 600 products, or $10 billion worth of goods, related to the housing market. This equals roughly a $1 billion tariff on the housing industry alone.

As for actual sales, the story isn't much better. Sales of existing homes were unchanged in August. The average selling price increased 4.6 percent from a year ago. This increase is keeping would-be buyers out of the market. A tally of the type of homes selling gives a clearer picture of the lopsided condition of housing. Sales of homes valued at $250,000 or less declined 13.6 percent from a year ago, while homes priced over $1 million increased 11.8 percent.

Key Indicators this Week:

Manufacturing – The Empire Manufacturing Index and the Philadelphia Fed Manufacturing Business Outlook Survey are two key regional measures for the manufacturing industry. The September headline tally for the Empire index fell over six points to 19, while the Philly Fed index increased 11 points to 22.9. While the indices seem to paint opposite pictures, it is again important to look at the components of the indices. In both cases, subcomponents point to increased demand and optimism among manufacturers. Orders picked up dramatically in the Empire region, with just a minor dip in the Philly index. In both cases, delivery time and unfilled orders increased. This suggests the current supply of goods is unable to meet demand, which, in turn, means manufacturing activity should continue. Trade concerns have weighed on the industry, but prices paid have either dipped or increased only modestly.

Trade Tariff – The week started with the Trump administration announcing an additional round of tariffs on $200 billion of Chinese imports. Originally thought to carry a 25 percent tariff, the new round is slated to start at 10 percent and increase later in the year. Beijing followed suit with a retaliatory tariff on $60 billion of U.S. goods. By the end of the week, light was beginning to shine at the end of the tariff tunnel. China announced it will begin to reduce the tariff rates from the majority of its trading partners. It is not clear yet how this move will affect imports from the U.S., but it puts China one step further in its goal to boost imports.

Strategically for Credit Unions:

The financial markets surged on all fronts this week. Stock prices rallied to new highs, bond yields jumped 10 basis points and the yield curve stopped flattening. The stock market shrugged off the latest battle of trade tariffs with the idea that a 10 percent tariff is better than a 25 percent tariff. The yield on the 10-year Treasury note soared past three percent, as traders positioned themselves for the Fed's rate hike next week. With short trades in place, there is a good chance yields will fall back at some point over the coming weeks. Be prepared and pay attention.

Sarina Freedland –Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.