The Housing Market is Moving Towards Balance

By | August 30, 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.


Wall Street stocks soared while U.S. Treasury yields fell on Friday after Federal Reserve Chair Jerome Powell indicated that the U.S. central bank could begin scaling back its bond buying program by year-end but did not give a firm timeline. Powell’s much-anticipated speech was noncommittal on the precise timing of the Fed’s bond tapering, unlike earlier remarks by several regional Fed presidents who wanted tapering to start soon. At the Fed’s annual Jackson Hole, Wyoming conference, Powell expressed caution about raising interest rates as the Fed tries to nurse the economy back to full employment and would avoid chasing “transitory” inflation. Following the speech, the S&P 500 and the Nasdaq closed at record highs for a fourth time this week. The Dow Jones Industrial Average rose 0.69% to 35,455.8. the S&P 500 gained 0.88% to 4,509.37 and the Nasdaq Composite added 1.23% to 15,129.50. Oil prices jumped more than 2% on Friday as energy companied began to shut down operations in the Gulf of Mexico ahead of a major hurricane expected to hit early this week.

Consumers took a break in July, with personal spending falling 0.1%. Real outlays for durable goods fell 2.6%. Spending on motor vehicles and parts fell 3.7%, largely due to lack of cars and light trucks for sale. Dealer lots are nearly empty, with several dealerships down to a handful of cars. Consumers certainly have income to spend ad personal income rose 1.1% in July, with wages and salaries up 0.9%. The Child Care Act helped boost overall incomes. Consumers are still sitting on a lot of cash, as the personal savings rate increased to 9.6%. Future spending is clouded by a sharp drop in consumer confidence where sentiment dropped by 11 points earlier in the month and only rose by 0.1 of a percentage point later in the month. The decline likely reflects concerns about rising COVID infections tied to the Delta variant. The ties between confidence and spending are loose. In the past, outbreaks of unfavorable headline news can affect confidence quickly but not influence spending. Over time, however, the consumer will adjust to unfavorable news, which raises some caution flags about consumption.

The slowdown in consumption may help production to begin to catch up with consumption. Durable goods orders fell 0.1% in July and the core capital goods orders excluding aircraft was flat, while orders for autos surged 2.6%. Goods spending fell 1.6% in July and durable goods saw a 2.6% decline. Slower spending on goods should help the supply chain problems, except in the case of autos. The global microchip shortage is likely to linger into early 2022 before increased production of chips happens in enough numbers to give global car and truck manufacturers a break. Until then manufacturing schedules will be confused and inventories will be at very low levels before starting to balance back out. Other manufacturing commodities are starting to come into balance and the PCE deflator, while still elevated did moderate to 0.4% in July from 0.5%.

This month’s housing data suggest the market is moving towards balance. To be sure, inventories of existing homes are still low and homes are selling quickly and above the asking price. The inventory of existing homes is trending higher since February and now sits at a 2.6-month supply. A 5.5-month supply was considered normal before the pandemic. Existing home sales increased 2% in July to a 5.99 million units annualized. A sub-3% 30-year fixed mortgage rate along with a steadily improving labor market helped support the boost in existing home sales. Meantime, new home sales rose 1.0% to 708,000 annualized unit pace, ending three months of declines. Home buying has cooled off in recent months, along with low inventories and soaring prices. At the current sales pace, inventory would be gone in 6.2 months, compared to 6.0 in June and 3.6 months in July 2020. Slowly but surely, supply and demand are converging.

Next week will be busy for economic data, with construction spending, booth ISM indexes, auto sales, trade balance and the important payrolls report.

Latest Data

The U.S. Economy:

Existing home sales increased 2% in July to a 5.99 million units annualized. A sub-3% 30-year fixed mortgage rate along with a steadily improving labor market helped support the boost in existing home sales. Single-family sales increased 2.7% and condo/co-op sales fell 2.7% in July. Overall, sales were higher on all Census regions except in the Northeast, where they were flat from the previous month. July marked the second monthly increase, but sales were up only modestly from a year earlier, suggesting the red0hot housing market may be cooling down a little. Pricing is an issue for some consumers. The median price in July was $359,000, up 17.8% from a year earlier. That gain is modest compared to the 20%-25% year=over=year increases earlier this year. The average number of days homes remained on the market was 17 days unchanged from June but down from 22 days in July 2020.

New home sales increased 1% to 708,000 annualized units in July, breaking a three-month spell of declines. June’s number was revised to 701,000 from the previous 676,000 number. July’s increase was driven mainly by the West and to a lesser extant the South. Sales decline in the Midwest and Northeast. Home prices have soared in recent months pushing some potential customers out of the market. The median price of a new home is July was $390.500, up 18.4% from a year earlier.

Durable goods orders fell 0.1% in July, following a 0.8% increase in June. Transportation was a drag as orders dropped 2.2%, the first decline after two monthly increases. Excluding transportation, orders increased 0.7%. Shipments increased 2.2%, up four of the last five months. Unfilled orders increased 0.3% in July, up six consecutive months. Core capital goods orders were unchanged and shipments advanced 1% in July. Orders for planes sank almost 50% in July but has increased strongly the previous two months. Orders for motor vehicles and parts rose 5.8% but production is constrained largely because of semiconductors. Bookings out-side of transportation remain generally strong. Orders for machinery, primary metals and computers all rose in July. The outlook for manufacturing is good, but the pace of increase is starting to slow.

Nominal personal income rose 1.1% in July, above expectations, following a 0.2% increase in June. The July improvement was mostly driven by government transfers, which increased 2.9% in July, thanks to the Child Care Tax Credit, after falling 1.8% in June. Meantime, compensation of employees posted a 0.9% gain, up from June’s 0.8% increase. The personal savings rate climbed to 9.6% from 8.8% the month before. The increase in spending July did not help the consumer spend extra money. Personal spending dipped 0.1%, following a gain of 0.5% in June. The report suggests the shift is continuing back towards services and away from goods. Goods sending fell 1.6%, while service spending rose 0.6%. The Durable goods spending fell 2.6% and nondurable goods spending increased 0.9%. The PCE deflator moderated to a 0.4% gain in July, following a 0.5% rise in June. Excluding food and energy, the core PCE deflator rose 0.3%, weaker than June’s 0.5% gain. On a year ago basis, the PCE deflator was up 3.6%, the same as in June.

The nominal U.S. goods trade deficit narrowed in July from $92.1 billion in June to $86.4 billion in July. Nominal exports increased 1.5% in July, compared to a 0.2% gain in June. Nominal goods imports fell 1.4%, reversing most of the 1.8% gain in June. The drop in imports can not be blamed on autos, which were up 3.9%.

Important Data Releases This Week

The July ISM manufacturing report will be released on Wednesday, September 1 at 10:00 AM.  Supply bottlenecks continue to hamper production in the nation’s factory sector. The ISM manufacturing index slipped to a still elevated reading of 59.5 in July. New orders, production and inventories fell last month. There were a few signs that the shortages in inputs and labor were starting to ease in July. Employment increased to the positive range and prices fell back modestly. The supplier delivery index fell to a five-month low of 72.5. Slower demand will help bring the supply chain problem back to more normal levels, although it will take more time. The ISM manufacturing index should backtrack to 58.5 for August.

The July construction spending report will be released on Wednesday, September 1 at 10:00 AM. Construction spending edged up 0.1% in June. Again, all the gain was in the residential sector, which climbed 1.1%. Nonresidential construction spending fell 0.9%. The residential sector is seeing a slowdown over the last few months as high costs of building materials and labor has hurt construction. We look for modest 0.1% gain for July.

The July ISM services index will be released on Friday, September 3 at 10:00 AM. The service side is doing good, but we expect some pullback from COVID and a slower economy in general. The ISM service index is projected to drop from 64.1 to 62. The July employment report will be released on Friday, September 3 at 8:30 AM. Employment is gaining momentum. Employers added 94.3K in July, bringing the three-month average to 832K, the fastest pace since October last year. Government payrolls increased sharply as schools reopened, likely overstating the topline number. Still, leisure/hospitality made a big gain. Wages are still rising at a fast pace, suggesting employers still need workers. We project payrolls to increase by 825K for August.

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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.