Home Prices Still Rising but Have Slowed Down

By | September 28, 2021

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

The Dow and S&P 500 edged higher on Friday after a volatile week, helped by gains in Tesla and Facebook that offset losses in makers of athletic wear when they warned of delays of their products during the holiday shopping season. Nike’s shares fell 6,3% and were the biggest drag on the Dow and shares of Foot Locket also fell sharply. On Friday, Evergrande’s electric car unit warned it faced an uncertain future unless it got a swift cash infusion, the clearest sign that the property developer’s liquidity crisis is worsening in other parts of its business. The Dow Jones Industrial Average rose 33.8 points, or 0.1% to 34,798, the S&P 500 gained 6.5 points, or 0.15% to 4,455.48 and the Nasdaq Composite dropped 4.55 points, or 0.3% to 15,047.50. Stocks bounced back from a sharp selloff earlier in the week tied in part to concerns over a default by China’s Evergrande and its risk to global financial markets. There are also concerns over Joe Biden’s budget and debt ceiling issues. The Republican party’s turnaround on debt is interesting after it was responsible for raising the debt ceiling several times during the Trump years.

Last week, attention was centered on the Federal Reserve’s two-day meeting of the Open Market Committee. As broadly expected, the committee members did not make any major changes to monetary policy. Officials elected to keep the fed funds rate unchanged at 0.00% to 0.25%. It also maintained its rate of monthly asset purchases. However, the FMOC said that scaling back the bond buying program “may soon be warranted.” Overall, the FMOC showed that Fed officials think the prospects for the economy are still bright even though the Delta variant and supply chain problems are causing headwinds. The bond purchase program was aimed to keep interest rates low, a major help to the housing market, although the central aim of the program was to keep the financial system functioning at a smooth level.

The average 30-year mortgage rate was 2.8% in August, close to the record lows hit last year. Low rates are a help but the main boost to housing was the consumer who desired more living space to accommodate virtual activities and increase the tolerability of spending more time at home. Housing jumped out of the block last year but has cooled off this year. Exiting home sales declined 2.0% to a 5.88 million-unit pace. This is weaker than last year but still decent from a historical view as it exceeds any level seen between 2010 and 2019. Some of the moderation in sales can be traced to a lack of supply. The number of homes available for sale at the end of August totaled just 1.29 million, down 1.5% m/m and 13.4% lower than a year earlier. This has led to a runup in house price appreciation, which are pushing many potential customers to the sidelines. Some relief seems to be on the way, Housing starts rose 3.9%, while building permits jumped 6%. Single-family home starts declined slightly but are still running at 1,1 million pace, which is considered a strong rate. Demand remains strong, so the decline in single0family starts likely had to do with supply chain and labor shortages. Limber supply has firmed but there are noted shortages in doors, windows, cabinets and other essential building materials. The increase in permits reflect the strength of the underlying market.

Home prices are still rising but have slowed down in recent months. New home sales increased 1.5% to 740,000 annualized units.  The median price of new home sold in August was $390,900. This represents an inventory of 6.1 months at the current sales price, the highest in 13 years. The increase in permits and some additional supply of new home suggest some help is coming to housing. The pace of sales and starts are expected to perk up modestly for the remainder of the year and jump ahead of the Fed’s first tightening move in 2022. Higher rates do suggest lower activity as the Fed starts tightening.

Next week will be focused on durable goods, personal income and outlays, construction spending, pending home sales, advance trade in goods and the ISM manufacturing index.

Latest Data

The U.S. Economy:

Housing starts increased 3.9% from July and were up 17.4% from a year earlier. The August increase was fueled from the multi-family sector. Single-family starts fell 2.8% to an annual pace of 1.076 million. The multi-family sector increased 21.6% to 530,000. Permits were more promising as they increased 6.0% to an annual rate of 1.728 million. Single-family permits rose 0.6% to 1.054 million. The multi-family sector saw permits rise by 19.7% to 632,000. The report suggests that builders are responding to low interest rates, a limited supply of existing homes and sturdy demand. This comes amid problems such as a shortage of building materials and a tight labor market. Demand is strong and a growing job market will keep housing demand strong. The cost of a new home is high, although there are signs of a slowdown in the recent high growth rates. This will keep demand healthy in coming months.

Existing home sales dropped 2% in August to 5.88 million units annualized, reversing most of July’s gain. The pace is still elevated compared to the pre-pandemic pace. Sales were down 1.5% from August 2020. In July, sales were running 15% ahead of last year and roughly 12% from where they were in the first eight months of 2019. The median price rose but a t a slower pace than in recent months. The median price was $356,000, an increase of 14.9% from August 2020. Price trend have been moderating from the big increases in the first half of the year. The high costs are keeping many first-time buyers off the market. Inventories stood at 1.29 million, down 1.5% from July and down 32% from a year ago. The inventory-to-sales ratio was 1.6 months. Demand is still strong, houses were sold on an average of 17 days in August, unchanged from July and down from 22 days in august 2020. The expectations of higher mortgage rates will drive some buyers to move before the Fed starts to tighten in 2022.

The Chicago Fed National Activity Index registered at 0.29 in August, down from 0.75 in July. The index suggests business activity slowed in August but remains at a high level. All four categories were positive in August but only one category improved in August. The consumption and housing component rose from a negative reading to a positive one. Forty-nine of the 85 indicators made positive contributions to the CFNAI in August. Production-related indicators contributes + 0.11 to the CFNAI in August. The sales, orders and inventories moved down to +0.03 in August from 0.07 in July. The employment, unemployment and hours worked decreased to 0.12 in August from 0.38 in July. The personal consumption and housing index contributed 0.03 to the CFNAI in August, up from -0.09 in July.

The Conference Board’s Leading Economic Index rose 0.9% in August, following a gain of 0.8% in July and 0.6% in June. The report is consistent with healthy economic growth. While inflation and COVID fears did dampen economic activity in August. While the Delta variant, alongside inflation fears could create headwinds for labor markets and consumer spending in the near term, the trend of the LEI is consistent with robust economic growth for the remainder of the year.

New home sales climbed in august to a four-month high and are performing better than expected in the third quarter, supporting a upbeat view of sales for the remainder of the year. New home sales increased 1.5% to 740,000 annualized units. In addition, there was an upward revision for July to 729,000 annualized units. Sales increased 6.0% in the South and soared 26.1% in the Northeast but tumbled 31.1% in the Midwest. Sales were down 24.3% from a year earlier. They have struggled to make gains since surging to 993,000 in January, Builders have been constrained by higher prices for inputs, as well as shortages of land and labor. About 78% of the homes sold in August were either under construction, or yet to be built. The median price of new home sold in August was $390,900. This represents an inventory of 6.1 months at the current sales price, the highest in 13 years. The data suggests that the surge in new sales following the pandemic has ebbed and sales have returned to a more normal pace. Sales of previously home sales fell in August and it appears price increases have cooled. Demand is likely to cool further after the Fed announced this week it will reduce bond purchases by the end of the year and signaled interest rate increases will likely follow.

Important Data Releases This Week

The August durable goods report will be released on Monday, September 27 at 8:30 AM. We expect that durable goods orders will advance 0.6% for August after slipping modestly in July. The ISM index shows that new orders demand remains strong. Aircraft orders fell in July bit look more neutral for August. Orders for autos likely fell after a big gain in July. Core capital goods orders have been strong, with orders 9% ahead of its pre-pandemic peak. There is a need to replenish inventories, which are quite low. Production has been constrained by input shortages, which have led to s surge in backlogs1. Shipments are strong and likely to get stronger. All of this bodes well for the factory sector.

The August personal income and outlays report will be released on Friday, October 1 at 8:30 AM. We expect personal income to have increased 0.1% in August and it would have been larger except for fading stimulus. Excluding transfers, income growth from salaries and wages is remain quite strong. Personal spending should rebound to 0.6%, up from the 0.3% advance in July. Retail sales advanced 0.7% for the month. Service spending was likely hurt by the rise in COVID cases but each advance in the virus has resulted in a less impact on the economy.

The August ISM report will be released on Friday, October 1 at 8:30 AM. The ISM manufacturing index will likely show a robust manufacturing sector despite supply chain shortages. The index will likely rise to 60.2 from the 59.9 reading s month earlier. Although it seems clear that supply chain bottlenecks are worsening, not getting better, we will look for some glimpses of improvement in the supply chain problem, like the increase in inventories last month. COVID outbreaks are a concern for manufacturing firms because they do affect employment gains. As infections are starting to backtrack in early-September, there may be some relief ahead.

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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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