The Housing Market is Getting a Break From Lower Mortgage Rates

By | June 24, 2019

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

World stocks fell on Friday as worries about a military strike against Iran and a global trade conflict took the edge of a central bank induced rally earlier in the week. The New York Times reported that U.S. President Donald Trump approved military strikes against Iran on Friday in retaliation for the downing of an unmanned surveillance drone and then pulled back from launching the attack. Worries about possible military strikes persist and the MSCI index of Asian-Pacific shares outside of Japan, fell 0.15% on Friday but up nearly 4% for the week. Meantime, China and the United States are set to resume trade talks before Presidents Donald Trump and Xi Jinping meet next week in Japan. Hopes of an agreement grew after the two leaders talked by telephone, but neither side has signaled a shift from positions that led to an impasse last month. The Fed’s signal about possible rate cuts brought some relief to investors in recent days.

Wall Street edged lower on Friday as U.S. Vice President Mike Pence’s decision to defer a speech on China policy increased optimism on upcoming trade talks between Washington and Beijing, while tensions between the United States and Iran undercut sentiment. The Dow Jones Industrial Average dipped 0.13% to end at 26,719.13 points, while the S&P 500 lost 0.13% to 2,950.46. For the week, the Dow added 1.41% and the S&P gained 2.2%. The S&P closed at a record high on Thursday after the U.S. central bank indicated it was ready to cut rates if needed in the face of risks including the U.S.-China trade war.

The Federal Reserve’s Open Market Committee kept its target range for the fed funds rate but changes to its statement suggest the central bank is open to possibly cutting rates. The statement changed the forward guidance and noted uncertainties about the outlook have increased. One voting member dissented and voted for an immediate rate cut. The update dot-plot showed eight participants anticipating cutting rates this year, with seven expecting two cuts. Fed Chairman Powell said, “Seven weeks ago we had a good jobs report and came out of the meeting feeling the economy and out policy was in a good place. News abut trade has been an important driver of sentiment in the interim.” The fact that so many members of the committee moved into the cut camp is surprising. Seven members are looking for two cuts in 2019. A lot will depend on developments at the G-12 meeting in the last week of June.

Economic data has been mixed. The latest employment report was weak, but the three-month average is decent for this stage of the expansion. Manufacturing is weak but the consumer side is solid. Inflation is weak. Consumer confidence is holding up, but business confidence is starting to waver. The cloud hanging over the horizon is the uncertainty of trade. The Federal Reserve is ready to lower rates as insurance the outlook starts to fall apart. Next week, all eyes will be on the meeting as investors are desperate for any signs of a thaw in U.S.-China relations. Investor do not need a complete deal at the G-20 to add confidence but the market assurance that there’s a de-escalation of trade tensions. In a press conference after the FMOC meeting, Chairman Jerome Powell said while the base economic outlook looks “favorable,” risks continue to grow, including the drag rising trade tensions may have on business investment and signs of slowing growth overseas.

Last week, we got a look at some of the more cyclical sectors of the economy. The housing market is getting a break from lower mortgage rates but has not meaningfully accelerated. While existing home sales are still down 1.1% y/y, they rose 2.5% in May and are trending in the right direction. Housing starts fell 0.9% in May and remain 5.3% below their prior-year pace. Meantime, purchasing manager survey have plummeted this month. The Empire index dropped 26.4 (the largest drop on record) and Philly index dropped 16.3. The Markit manufacturing PMI dropped to 50.7, the lowest level since February 2016.

Next week, we get a look at the Chicago Fed National Activity index, new and pending home indexes, wholesale inventories, durable goods orders and personal income and outlays.

Latest Data

The U.S. Economy:

The NAHB homebuilder optimism index lost two points in June, falling to 64. All three subcomponents fell in June. Current sales fell from 72 to 71. Sales expected in the next six months fell from 72 to 70. Customer traffic fell from 49 to 48. The index does remain elevated but housing as been basically flat for two-and-a-half years.

Housing starts slipped slightly in May, falling 0.9% to an annual ace of 1.269 million units. Starts were down 4.7% y/y. Sigle-family starts fell 6.4% to an annual ace of 820,000, while the multifamily sector saw starts increase 10.9% to an annual ace of 449,000. Permits inched up 0.3% to 1.294 million. Single-family permits gained 3.7% in May, while the multifamily sector saw a 5.0% decline. Housing has been basically flat since 2016 but higher mortgage rates have had an impact on sales. Mortgage rates have retreated since last November, but the decline in rates has not yet, sparked greater activity. Fundamentals for housing are positive but the market is not likely to gain much ground for the next few years. Low inventories and rising prices are headwinds, as well as a tight labor market. Although the demographics show room for growth, activity will continue to be slow for housing.

Existing home sales increased 2.5% in May to an annual rate of 5.34 million unit, up from 5.21 million in April. Existing single-family sales totaled 4.75 million in May, up 2.6% from April. Existing single-family inventories totaled 1.7 million, up 5.6% from April and up 2.4% from a year earlier. The inventory-to-sales ratio was 4.3 months for single-family homes, up 0.1% from April and 0.1% from Ari 2018. Existing condo/co-op sales totaled 590,000 in May, up 1.7% from April. Listings of condo/co-op units totaled 219,000 in May, down 0.9% from April. The condo/co-op I/S ratio was 4.5 months, down 0.4% from April and down 0.4% from a year earlier. After peaking at 4.87% in November, the 30-year mortgage rate fell to 4.07% in April, a decrease of 80 basis points. As a result, sales are well above the low point in January. Sales are still well shot of levels seen in 2017, in part because of short supply of listings. The market needs to increase supply of existing homes, or boost single-family home construction to boost activity.

Important Data Releases This Week

World stocks fell on Friday as worries about a military strike against Iran and a global trade conflict took the edge of a central bank induced rally earlier in the week. The New York Times reported that U.S. President Donald Trump approved military strikes against Iran on Friday in retaliation for the downing of an unmanned surveillance drone and then pulled back from launching the attack. Worries about possible military strikes persist and the MSCI index of Asian-Pacific shares outside of Japan, fell 0.15% on Friday but up nearly 4% for the week. Meantime, China and the United States are set to resume trade talks before Presidents Donald Trump and Xi Jinping meet next week in Japan. Hopes of an agreement grew after the two leaders talked by telephone, but neither side has signaled a shift from positions that led to an impasse last month. The Fed’s signal about possible rate cuts brought some relief to investors in recent days.

Wall Street edged lower on Friday as U.S. Vice President Mike Pence’s decision to defer a speech on China policy increased optimism on upcoming trade talks between Washington and Beijing, while tensions between the United States and Iran undercut sentiment. The Dow Jones Industrial Average dipped 0.13% to end at 26,719.13 points, while the S&P 500 lost 0.13% to 2,950.46. For the week, the Dow added 1.41% and the S&P gained 2.2%. The S&P closed at a record high on Thursday after the U.S. central bank indicated it was ready to cut rates if needed in the face of risks including the U.S.-China trade war.

The Federal Reserve’s Open Market Committee kept its target range for the fed funds rate but changes to its statement suggest the central bank is open to possibly cutting rates. The statement changed the forward guidance and noted uncertainties about the outlook have increased. One voting member dissented and voted for an immediate rate cut. The update dot-plot showed eight participants anticipating cutting rates this year, with seven expecting two cuts. Fed Chairman Powell said, “Seven weeks ago we had a good jobs report and came out of the meeting feeling the economy and out policy was in a good place. News abut trade has been an important driver of sentiment in the interim.” The fact that so many members of the committee moved into the cut camp is surprising. Seven members are looking for two cuts in 2019. A lot will depend on developments at the G-12 meeting in the last week of June.

Economic data has been mixed. The latest employment report was weak, but the three-month average is decent for this stage of the expansion. Manufacturing is weak but the consumer side is solid. Inflation is weak. Consumer confidence is holding up, but business confidence is starting to waver. The cloud hanging over the horizon is the uncertainty of trade. The Federal Reserve is ready to lower rates as insurance the outlook starts to fall apart. Next week, all eyes will be on the meeting as investors are desperate for any signs of a thaw in U.S.-China relations. Investor do not need a complete deal at the G-20 to add confidence but the market assurance that there’s a de-escalation of trade tensions. In a press conference after the FMOC meeting, Chairman Jerome Powell said while the base economic outlook looks “favorable,” risks continue to grow, including the drag rising trade tensions may have on business investment and signs of slowing growth overseas.

Last week, we got a look at some of the more cyclical sectors of the economy. The housing market is getting a break from lower mortgage rates but has not meaningfully accelerated. While existing home sales are still down 1.1% y/y, they rose 2.5% in May and are trending in the right direction. Housing starts fell 0.9% in May and remain 5.3% below their prior-year pace. Meantime, purchasing manager survey have plummeted this month. The Empire index dropped 26.4 (the largest drop on record) and Philly index dropped 16.3. The Markit manufacturing PMI dropped to 50.7, the lowest level since February 2016.

Next week, we get a look at the Chicago Fed National Activity index, new and pending home indexes, wholesale inventories, durable goods orders and personal income and outlays.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.

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