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Housing Daunted - October 23, 2018

Between a Rock and a Hard Place

Last week we reported on the NAHB’s Housing Market Index. Builder optimism was fueled by “solid housing demand” and the reduction of some cost pressures as the price of lumber slid. The past week brought a torrent of data that could indicate rain in the housing market forecast. Housing Permits dropped month on month in September, despite the August data being revised down, and are now down 1% YoY. Housing Starts are up 3.7% YoY, but dropped more than 5% month on month and appear to be continuing a broad decline. Mortgage applications dropped more than 7% week on week as the MBA Purchase Index dropped nearly 8% YoY. And to round it all off, Existing Home Sales dropped 3.4% MoM and are now down more than 4% YoY as sales underperformed “across the country”.

In the coverage of this data, affordability has been discussed up repeatedly. On the one hand, mortgage rates are sitting five basis points below recent highs. The Fed minutes released last week showed a Fed that expects to continue to hike, with some members expecting hikes of the Fed Funds rate to continue to levels “above their assessments of its longer-run level”. On the other hand, price inflation continues. Highlighted by a recent Bloomberg article, as Californians become ex-Californians, they appear to be taking increased housing costs with them. With costs high and sales volume low, it appears that the housing market is stuck between a rock and a hard place.

There is, however, one way that housing may avoid the Scylla and Charybdis of rising rates and rising prices – wages. On that front, things don’t look great. According to projections by CoreLogic, with both home prices and mortgage rates rising, despite projected gains in real disposable income, “homebuyers would see a larger chunk of their incomes devoted to mortgage payments.” Additionally, the disconnect between labor tightness and wages that we’ve highlighted before appears to be continuing, this time appearing in Richmond Fed Manufacturing data. Though the Skills Availability index hit an all-time low as firms struggled to find qualified workers, the Wages and Workweek Indexes dropped. The Richmond Fed’s 6-month outlook on wages Index hit levels last seen in 2001. Will this be a case of “free beer tomorrow”? With that in mind, we will have our eyes on personal income data released next week for signs that wages are picking up. In the meantime, we are concerned that New and Pending Home Sales, released later this week will echo the Homebuilders ETF, XHB, which has been warning that all is not well on the housing front.

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