GDP Beats Forecasts
In my last blog post, I reported sales of newly built home increased 40% month over month in December lending optimism that maybe the fourth quarter slowdown in housing would be a short-lived breather followed by a pick up in sales as we near the spring market. Unfortunately, data released last week reported a decline in new home starts in December, while existing home sales declined 1.2% month over month in January, and by a whopping 8.5% from January 2018. On a positive note, the forward indicating pending home sales index climbed 11% from December, but is still below January 2018 activity by 2.3%.
While housing data has been a mixed bag over the past few months, I believe housing activity over the next few months will show the market remains strong. We'll continue to see more inventory coming on the market with prices moderating and the number of sales continuing to decline from the previous year, however, mortgage rates, and the economy will remain stable throughout the year which should lend support to the housing market. We've experienced an unsustainable run up in housing prices over the past few years, which has stretched affordability to its limits. Keeping things in perspective, a decline in annual price gains from 6-8% to a more moderate and sustainable 3%, is healthy and essential if we are to maintain a strong housing market. In short, 2019 will be a Goldilocks market with a balanced supply of inventory at moderating prices.
On to the numbers....
Stronger than expected economic growth data was unfavorable for mortgage rates this week. Progress in the trade negotiations also was negative, and mortgage rates ended the week higher.
GDP growth for the year was a solid 2.9%, which was the highest level since 2015. Early forecasts for 2019 generally are for slower growth below 2.5% based on fading stimulus effects from U.S. tax cuts and economic weakness overseas.
The latest report on home construction revealed somewhat disappointing news for activity at the end of 2018. The data for housing starts in December, which also was delayed by the government shutdown, showed an unexpectedly large decline of 11% from November to the lowest level since September 2016. Single-family starts fell 7% from November, while the more volatile multi-family segment dropped 20%. Building permits for single-family homes, a leading indicator of future construction, decreased a little from November.
As expected, President Trump postponed the increase in U.S. tariffs on Chinese goods which had been scheduled to take place on March 1. According to trade officials, the U.S. will "suspend the scheduled tariff increase until further notice." A trade deal likely would lead to faster global economic growth, which would raise the outlook for future inflation. As a result, the signs of progress in the negotiations seen this week were negative for mortgage rates.
Fed Chair Jerome Powell did not provide any new information about future monetary policy in his semi-annual testimony to Congress on Tuesday and Wednesday. Powell described a healthy outlook for the U.S. economy subject to uncertainty in areas including the pace of global growth, the trade negotiations, and Brexit (the British exit from the European Union). He confirmed that Fed officials will be "patient" in assessing the need for additional rate hikes and that they are "close" to agreeing on the appropriate size of the balance sheet.
Looking ahead, the important monthly Employment report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national services index will come out on Tuesday. The next European Central Bank (ECB) meeting will take place on Thursday and could influence U.S. mortgage rates. Investors also will be watching for signs of progress in the trade talks between the U.S. and China.
The government shutdown which began on December 22 and ended on January 25 has caused delays in the release of some economic reports produced by government agencies and likely will continue to do so until the affected agencies get caught up. It is generally not known when the postponed data will be ready to be released.