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Builder must-know: Kansas City Fed district growth slows slightly
The general business conditions index slipped 6 points to +3, coming off two strong readings in May and July. Interestingly, one reason for moderation in factory growth was attributed to difficulty finding qualified workers.
The Richmond Fed Manufacturing Survey looks at business conditions in the Fed’s fifth district, which covers Washington, DC, Baltimore, Richmond, and Charlotte.
Overall increases in business activity and consumption are starting to drive more business for homebuilders, like Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), and PulteGroup (PHM).
The index finished the week at 37.3—a small increase from the prior week. The report is on balance negative. This isn’t surprising, given that the index itself is below 50.
The Case-Shiller Index is the most widely quoted index of real estate values. Real estate values are big drivers of consumer confidence and spending, so they have an enormous effect on the economy.
In the latest survey, 59% of respondents said the economy is on the wrong track—an increase of 5% from last month and over the past year.
The 2.3% home price expectation is much lower than the 6%–7% forecast we’re seeing out of the National Association of Realtors and the mid single-digit forecast we’re seeing from most Wall Street professionals.
For most citizens, their primary residence is their biggest asset. As a result, their spending patterns are highly levered to housing.
There are many reasons why a region may outperform another region. The biggest reason is usually the underlying performance of the economy.
In June, home prices rose 0.4% month-over-month. They’re up 4.5% year-over-year. Prices are now within 6.5% of their April 2007 peak and correspond to July 2005 levels.
July new home sales, as reported by the Census Bureau and the Department of Housing and Urban Development, decreased 2.4% from June.
The 7.5% year-over-year gain resembles the gains we saw during the bubble years. Month-over-month basis, the increase was only 1.0%—still pretty decent.
The National Association of Realtors (or NAR) reports existing home sales once a month. The seasonally adjusted number reports completed transactions in single-family homes, condominiums, townhomes, and co-ops.
Analysts use the information to anticipate the future production for homebuilders, the future demand for raw materials, and labor costs.
Homebuilder earnings season is over. The builders generally increased their top lines by raising prices, not by selling more units. If anything, a typical report would be a 12% increase in ASPs (average selling prices) and a 10% drop in deliveries.
The average 30-year fixed-rate mortgage stayed flat to close at 4.28%. The ten-year yield rose six basis points, but mortgage rates didn’t react to last Friday’s big move in bond rates.
In terms of the economic forecast, the Fed took down its estimate for unemployment and future gross domestic product (or GDP) growth. Another implication is that the economy’s “speed limit” has been lowered. This means that inflation will be an issue sooner than people would like.
Ever since President Obama mentioned a “recovery summer” early in his tenure, the term has become a bit of a running joke. The economy remained tepid. This summer, however, we may actually see a recovery.
Since interest rates can’t go below zero, if deflation increases, it causes real—inflation-adjusted—interest rates to increase. This is exactly what we don’t want to see in a depressed economy. On the other hand, if wages aren’t rising, inflation can cause disposable incomes to shrink. This is negative for the economy.
The index came in at 55—an increase from 53 in July. Builder sentiment peaked last summer and had fallen to the mid-40s over the winter and through the spring. However, sentiment is picking up again. It’s approaching last summer’s levels.