Construction Corrects After Strong Run, Bernanke Reaffirms Desire to Wind Down QE3
- June Housing Starts fell by 9.9 percent to an 836,000 unit annual rate, slowest since August 2012.
- Permits for new residential construction dropped in June by 7.5 percent to a 911,000 unit rate.
- FOMC Chairman Bernanke reaffirmed his desire to wind down QE3, schedule will be data dependent.
After strong gains culminating in a million unit annual pace in March, housing starts slipped by 9.9 percent to an 836,000 unit annual rate. This appears to be part of a normal correction after a strong run, but it does bear watching over the next couple of months. Starts peaked in March at a 1.005 million unit rate and have been on a three-month declining trend since. Housing starts look like they have gotten ahead of new home sales. On an annual basis, starts increased robustly by 28 percent in 2012 while new home sales gained 20 percent, so a correction in 2013 should not be a surprise.
Another factor to consider is labor supply. Anecdotal reports of labor shortages impeding residential construction are widespread. Also, recent increases in mortgage rates, combined with improving prices, mean that housing affordability has dipped from historically high to just very high. The dip in affordability will likely continue into an ongoing trend as prices and mortgage rates continue to climb. However, at this point declining affordability is a headwind only for the most marginal buyers. Strong pent-up demand and fundamental demographic growth point to continued gains in home sales fueled by job creation, income growth and improving consumer confidence. Permits for new residential construction also fell in June, down by 7.5 percent to a 911,000 unit annual rate. On a year-ago basis permits are still up a healthy 16.1 percent.
In his testimony to the House Financial Services Committee, outgoing Federal Reserve Chairman Ben Bernanke reaffirmed his desire to wind down the Fed’s asset purchases this year as long as labor market conditions improve and the risk from very low inflation is low. The chairman outlined his ideal scenario that QE3 would be dialed down, in measured steps, through the first half of next year, ending around midyear. Market expectations are focused on a mid-September launch of QE3 calibration. The chairman did not affirm a specific date and also said nothing to counter the September expectation. Chairman Bernanke stressed that the actual path of QE3 calibration will be data dependent with a primary focus on labor markets and price levels.
Market Reaction: Equity markets are up. Treasury yields are down. NYMEX crude oil is down to $105.72/barrel. The dollar is up against the yen and down versus the euro.