Home builders fret over costs, but consumer demand remains high

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Home builders are unhappy because of rising prices for materials and also perhaps because the Trump administration has not to date accomplished the regulatory rollback they expected.

Nonetheless, consumers who have the money to buy homes continue to show a sturdy optimism in the economy, as the government’s June figures on housing starts and building permits revealed last week.

The Commerce Department said starts rose 8.3 percent from May, to an annualized rate of 1.22 million. It was the fastest annualized pace in four months, and single-family and multi-family construction increased.

Starts were up 2.1 percent from June of 2016, and the department’s report for May was revised upward to a rate of 1.12 million from 1.09 million.

Additionally, the number of new building permits issued in June rose 7.4 percent from May and it was up 5.1 percent from a year earlier.

“Single-family housing starts have been running way too low as inventories of homes available for sale have fallen to what the National Association of Realtors called ‘astoundingly low’ levels during the spring selling season,” Morgan Stanley economist Ted Wieseman said in a note to clients that MarketWatch cited in a news report. “Labor shortages, land shortages, regulatory bottlenecks, and, recently, rising lumber costs with the Canadian lumber tariffs have restrained new construction.”

Home builder confidence in the market for new single-family homes dropped two points in July, to 64, on the National Association of Home Builders/Wells Fargo Housing Market Index. The reading was the lowest since November. Every component of the index declined.

“Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” NAHB chairman Granger MacDonald, a home builder and developer from Kerrville, Texas, said in a statement. “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”

“The [Housing Market Index] measure of current sales conditions has been at 70 or higher for eight straight months, indicating strong demand for new homes,” NAHB chief economist Robert Dietz said. “However, builders will need to manage some increasing supply-side costs to keep home prices competitive.”

David Berson, a senior vice president and chief economist at Nationwide Mutual, said in a statement U.S. News & World Report used in a story that although housing gains in recent months have slowed "from the relatively rapid pace seen at the end of 2016 and beginning of this year," home construction is still increasing.

"New-home sales are moving higher in response to solid job gains, faster wage growth, still low mortgage rates and record-high household net worth,” Berson said. “This should push single-family starts upward over the remainder of 2017."

Last Thursday The Conference Board said its Leading Economic Index rose 0.6 percent in June, to 127.8, after a 0.2 percent increase in May and a 0.2 percent increase in April.

“The U.S. LEI rose sharply in June, pointing to continued growth in the U.S. economy and perhaps even a moderate improvement in GDP growth in the second half of the year,” Ataman Ozyildirim, director of business cycles and growth research at The Conference Board, said in a statement. “The broad-based gain in the U.S. LEI was led by a large contribution from housing permits, which improved after several months of weakness.”

Relatively few economic reports were released last week, but this week will be much more active. The Federal Open Market Committee, the policy-making arm of the Federal Reserve, will meet today and Wednesday. Reuters reported that the Fed is likely to leave interest rates alone because inflation remains weak.

"You have four [Consumer Price Index] prints which were not very good. Why are we concerned about inflation?" Jim Caron, portfolio manager at Morgan Stanley Investment Management in New York, told Reuters.

Reuters also said Caron and some analysts expect inflation to rebound in the second half of the year, in part because of further tightening in the labor market.

Economy watchers additionally will see two major barometers of consumer sentiment this week. The Conference Board will release its Consumer Confidence Index for July today — while the Fed is meeting — and the University of Michigan will release its final Consumer Sentiment Index for July on Friday.

The Commerce Department will release its June report on new-home sales on Wednesday and will release its report on the nation’s second-quarter gross domestic product on Friday.

MarketWatch said economists’ consensus forecast is that the economy grew 2.8 percent for the quarter, which would be double the first-quarter rate and a strong signal that the economy remains on a sound footing despite the continuing political turmoil in Washington, D.C.

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