Housing Turns the Corner, Are Gains Sustainable?
- Housing Starts for June increased by 6.9 percent to a 760,000 unit annual rate.
- June Permits for new residential construction decreased by 3.7 percent to a 755,000 unit rate.
- Mortgage Applications for the week ending July 13 jumped by 16.9 percent on strong refi activity.
- Beige Book indicated modest-to-moderate expansion in June and early July for most of the U.S.
Residential real estate indicators continue to show improvement, with gains visible in sales, prices and construction. Housing starts for June increased by 6.9 percent to a 760,000 unit rate. This is still weak by historical standards, but it is the strongest building rate since October 2008. June permits for new construction fell by 3.7 percent to a 755,000 unit rate, giving back some of the large gain in May; however, the trend still looks good. A key question about housing is….are recent gains durable? The self-sustaining housing cycle starts with easing credit, which allows wealth-generating buyers to purchase cheap existing homes that are appreciating in value at very low interest rates. Real estate and financial services workers are employed and home owners circulate cash back into the economy with fix-up and move-in purchases. Growing confidence in the existing home market increases confidence in new home sales. New home sales spur construction, which demands materials and employs workers, adding two more positive feedback mechanisms. What could derail the train? Given the fundamental tightening in housing markets that is occurring because the rate of new home construction is far below the rate of household formation, only a significant decrease in household wealth, coming as a result of a moderate-to-strong recession would shift demand. Housing demand at this point is likely durable through a weakly growing economy, or through a mild recession. Lack of credit availability could also derail the train. A global financial market crisis could dry up credit availability, but that is looking less likely as Europe muddles through its financial, political and economic restructuring. Barring a hard recession in the U.S., a possibility increased by the approaching Fiscal Cliff and a melt-down in Europe, the positive trends in residential real estate look durable for now.
The Fed’s Beige Book reported that overall economic activity in most of its twelve districts expanded at a modest to moderate pace in June and early July. Employment grew tepidly in most markets, with U.S. fiscal policy uncertainty and weak demand cited. Housing markets were largely positive, with sales and construction levels increasing and inventories declining. Rising apartment rents spurred increases in multifamily construction in the San Francisco region. Dallas expected construction to pick up in coming months. Dallas manufacturing was also strong. San Francisco noted robust semiconductor production. Chicago, Kansas City and Dallas cited high heat and drought as concern for crop yields and livestock.
Market Reaction: Equity markets are up. Treasury yields are down. Oil is up to $89.87/barrel. The dollar is down against the yen and up versus the euro.