May Home Sales, Durable Goods Orders

Housing Heats Up Ahead of the Fed, Orders Lose Altitude on Aircraft

  • New Home Sales for May increased by 2.2 percent to an annual rate of 546,000 units.
  • Existing Home Sales in May gained 5.1 percent, to a 5.35 million unit annual rate.
  • New Orders for Durable Goods declined by 1.8 percent in May, still adjusting after a March surge.

May home sales confirm that the U.S. housing market is warming up, with increases in both new and existing home sales. Prices are firming and mortgage rates are increasing too. So it will be an interesting fall season for residential real estate markets if Federal Reserve Governor Jerome Powell’s expectations on interest rates come true. Powell said this morning that he expects the Federal Reserve to be ready to begin raising interest rates in September, followed by another increase in the fed funds rate in December. The yield on 10-Year Treasury bonds is up to 2.38 percent. According to the Mortgage Bankers Association, the interest rate on a 30-year fixed rate mortgage was 4.22 percent as of June 12. We agree with Governor Powell’s fed funds rate forecast, and we expect to see gradual upward pressure on mortgage rates through the second half of this year as a result of the Federal Reserve’s actions to gradually increase the funds rate.  We expect solid real income growth this year to support moderately increasing housing demand in the face of gradual upward pressure on interest rates.

New home sales increased by 2.2 percent in May to a 546,000 unit annual rate. This is still well below the series average of about 650,000 units per year since 1963. The months’ supply of new homes on the markets ticked down to a tight 4.5 months’ worth. Existing home sales increased by 5.1 percent in May to a 5.35 million unit rate. In contrast to new home sales, existing home sales are already close to their long-run average. The month’s supply of existing homes on the market ticked down to 5.1 months’ worth in May. The median sales price of an existing home was up 7.9 percent in May over the previous year.

New orders for durable goods declined by 1.8 percent in May. The drop in orders reflects volatility in commercial aircraft orders, down 35.3 percent in May. The May decline in total orders also follows a 5.1 percent surge in March. Core orders, nondefense capital goods excluding aircraft, increased by 0.4 percent, a reasonably healthy number for U.S. manufacturing.

Market Reaction: U.S. equity markets have given up opening gains. The 10-year Treasury bond yield is up to 2.38 percent. NYMEX crude oil is up to 60.96/barrel. Natural gas futures are down to $2.78/mmb

For a PDF version of this Comerica Economic Alert click here: New_Home Sales 06-23-15.

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