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Small Business Exuberance and Housing Wobbles - August 14, 2018

The E-word

The NFIB was back on the horn this week with its Small Business Optimism data. While the word irrational was not part of the release, “exuberance” did make an appearance, along with “amazing” and the emphatic “all good!”. The index hit 107.9, just 0.1 short of the record high set back in 1983. According to the NFIB’s President and CEO Juanita Duggan,

 “Small business owners are leading this economy and expressing optimism rivaling the highest levels in history”

Capital Spending maintained a “respectable pace” and strong plans to expand inventory accompanied strong sales. Additionally, a continuing tight labor market made difficulty of finding qualified workers the Single Most Important Problem, just one point from the record high set in 2006 (at which point average hourly earnings were growing at a rate north of 3.5% YoY.) The NFIB further reiterated its point from the Jobs Report, as we covered last week, that labor shortages in construction are “clearly restricting the construction of new homes and apartments.” And while the ECI numbers weren’t a major blowout, as we wrote at the end of July, there may be some wage inflation built in as “Firms in construction and manufacturing, sectors where wages are above average, account for the real strength in hiring plans.”

 Housing Wobbles

The Mortgage Bankers Association released its weekly data last Wednesday, with mortgage applications decreasing 3.0% week on week, and the overall purchases index down 2% YoY. The NAHB then released its Housing Opportunity Index on Thursday, which showed that housing affordability was at “a 10-year low in the second quarter of 2018”. This was due to increases in both the median home price and the average mortgage rate. As NAHB Chairman Randy Noel stated,

“Tight inventory conditions and rising construction costs are factors that are holding back housing and putting upward pressure on home prices... Meanwhile tariffs on Canadian lumber imports into the U.S. are further eroding housing affordability.”

The lumber problem is something we’ve covered before and has been featured in the news, such as this article in the Lansing State Journal. Time will tell if this narrative will fade with lumber futures prices now down more than 30% from the high in May. Expectations of higher mortgage rates were also cited as an additional headwind for home prices. The MBA is, however, sanguine on the mortgage market, forecasting 4% growth YoY in the third quarter, but acknowledges in its commentary that

“Faster wage growth is likely to overcome any headwind of increasing mortgage rates, but more home price appreciation in combination with the housing inventory shortage could put a damper on purchase market growth.”