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Housing’s Eroding Foundation

Learning Opportunities
  • 2017 Economic Forum – October 2-4 in Las Colinas, TX (up to 16 CPE credits) Walk-ins welcome.

The foundation of the housing market is crumbling, or at the very least, stalled and stagnant. Rising prices and dwindling inventory continue to erode progress made the past two years. National home prices rose 5.9 percent in July from a year ago. This is the highest annual increase in over three years. Twelve cities posted greater year-over-year price appreciation in July than in June, a signal that home prices may not have reached their peak. A lack of supply is the key driver of rising prices in most markets. In an earlier report this month, the number of previously owned homes for sale was down 6.5 percent from a year ago. Pending home sales, which represent signed contracts for existing homes, fell 2.6 percent in August, the sixth monthly drop this year. The National Association of Realtors projects 5.44 million homes sold this year, 0.2 percent below 2016 total sales.

The new home market is experiencing a decline in sales with a differing twist– growing inventory amid rising prices. Inventory of new homes rose 3.6 percent in August and almost 18 percent in the past 12 months. Homebuilders have focused on higher priced new homes, leaving a void of moderately priced homes for most buyers.

Some of the weakness in the August housing data can be attributed to Hurricane Harvey, but analysts are quick to point out the storm can’t be blamed for all of the weakness. Sales have been dwindling throughout the year, and the recent hurricanes are only adding more pressure to the market. Rebuilding activity will be the focus in much of the south and southeast in coming months. An estimated 185,000 homes were damaged or destroyed due to Hurricane Harvey. In Key West, over a quarter of the homes were destroyed and 65 percent damaged from Hurricane Irma.

Other Key Indicators this Week:

GDP – The final revision for second quarter GDP was released today, bringing the rate to 3.1 percent from 3.0 percent. The rise came from an increase in inventory investment. This is the strongest growth pace since first quarter 2015. Consumer spending remained at 3.3 percent, the fastest pace in a year. Even with the hurricane rebuilding activity expected to occur later this year and early next year, most economists do not see the U.S. breaking 3.0 percent in the near term. The estimate for third quarter growth is 2.2 percent.

Durable Goods – Orders for goods lasting more than three years rose 1.7 percent in August, more than expected. The proxy for business investment increased 0.9 percent and was revised higher the previous month. Business investment has been improving the past few months, with a strong boost by the energy sector. Orders increased for machinery and communications equipment. Demand for motor vehicle parts rebounded after months of decline.

Income and Spending – Both income and spending increased at a slower pace in August. Income was up 0.2 percent, and spending was up 0.1 percent. But the real meat of the monthly report was the core PCE year-over-year rate, which fell to 1.3 percent. August’s reading was the lowest this year and the lowest since July 2015. This is one of the Federal Reserve’s key measures for gauging inflation. The Fed has indicated they intend to increase rates in December, but they also want to see inflation move higher. So far, inflation doesn’t seem to be going their way.

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.