Is Housing Regaining Rightful Place in Driving US Economy?

Originally published by: BloombergJune 23, 2015

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America’s housing market is starting to heat up and provide some pep for an economy held back by lukewarm manufacturing.

Purchases of new homes climbed in May to a 546,000 annualized pace, the strongest since February 2008, according to Commerce Department data on Tuesday. Another report from the agency showed orders placed with factories for business equipment rose last month for just the second time this year.

Employment gains, greater income prospects and still-cheap borrowing costs are sparking demand for new properties, signaling builders may soon accelerate work on more projects. Construction will augment economic growth as manufacturers begin to recover from tepid global markets and a setback in energy-related capital spending.

“The housing recovery has picked up momentum, which provides a nice tailwind for the economy,” said Michelle Meyer, deputy head of U.S. economics at Bank of America Corp. in New York. “The better housing trajectory could provide some offset to the not-so-great results for manufacturing.”

Bookings for non-military capital goods excluding aircraft, a proxy for business equipment demand, climbed 0.4 percent in May after a 0.3 percent decrease a month earlier, the Commerce Department said. Orders for all durable goods dropped 1.8 percent, reflecting a decline in the volatile commercial aircraft category.

The gain in business equipment is “a welcome shift after recent declines,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “So long as energy prices remain reasonably stable and the dollar doesn’t appreciate too much more dramatically, we’ll see core durable goods orders trend back.”

June Manufacturing

Another report indicated the progress will be slow. The Markit Economics preliminary June index of manufacturing fell to the lowest level since October 2013.

The economy in the meantime will get some help from housing. The market has shown steady gains in the second quarter after gross domestic product weakened in the first three months of the year.

“For this quarter in particular, residential investment is going to be a significant contributor to topline growth,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets LLC in New York.

Housing’s Contribution

Residential construction added 0.16 percentage point to GDP in the first quarter, according to Commerce Department data.

Stocks rose, with the Standard & Poor’s 500 Index nearing a record, as investors weighed the economic data for clues on the timing of a Federal Reserve interest-rate increase amid optimism that a deal on Greek aid is within reach. The S&P 500 climbed 0.1 percent to 2,124.22 at the close in New York.

New-home sales account for almost 10 percent of the residential market, and a report Monday showed the remaining portion is also flexing some muscle.

Purchases of previously owned homes rose in May to the fastest pace since November 2009, according to the National Association of Realtors. Combined sales of new and existing properties rose to a 5.9 million annualized rate, the highest in almost eight years.

Economists’ Forecasts

The median forecast of 71 economists surveyed by Bloomberg called for a 523,000 annualized rate of new-home sales in Tuesday’s report. The Commerce Department revised the April reading up to a 534,000 pace from a previously estimated 517,000.

The increase in demand last month was led by an 87.5 percent surge in the Northeast, the biggest since July 2012. Sales in the West climbed 13.1 percent, while purchases fell in the Midwest and South. The setback in the South could have been caused by the floods that inundated parts of Texas last month.

The supply of homes at the current sales pace declined to 4.5 months, matching the lowest since June 2013, and signaling construction may begin to climb.

While housing starts declined 11.1 percent in May to a 1.04 million annualized rate, that followed a revised 1.17 million pace in April to cap the best back-to-back readings since late 2007, Commerce Department figures showed last week. Permits for future projects rose to the highest level in almost eight years.

Builder Sentiment

Homebuilders are feeling better about the outlook for sales. The National Association of Home Builders/Wells Fargo builder sentiment gauge rose to 59 this month, the strongest since September and exceeding all projections in a Bloomberg survey, from 54 in May.

“With housing markets continuing to recover, we are experiencing high levels of demand,” Jeffrey Mezger, chief executive officer at KB Home, said on a June 19 earnings call. “Inventory levels remain well below normal, and while there is still price appreciation occurring in most markets, it is at a more moderate and sustainable pace.”

The Commerce Department’s report on new-home sales showed the median sales price declined 1 percent from May 2014 to $282,800.

Relatively low borrowing costs also are still supporting would-be buyers who can qualify for credit. The average rate for a 30-year fixed mortgage was 4 percent in the week ended June 18, according to data from McLean, Virginia-based Freddie Mac. While that’s the second-highest rate this year, it’s still well below the 6.06 percent average from 2003 to 2007, when home sales boomed.


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