Housing sector on a spring winning streak

Two weeks ago, home resales were the player of the week. Last week, new-home sales stole the spotlight, but seen from either perspective the economy is winning because of contributions from these two heavy-hitting sectors.
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Two weeks ago, home resales were the player of the week. Last week, new-home sales stole the spotlight, but seen from either perspective the economy is winning because of contributions from these two heavy-hitting sectors.

The Commerce Department said May 24 that new-home sales reached an eight-year high in April, rising 16.6 percent to a seasonally adjusted annual rate of 619,000 units. That was the highest level since January 2008.

"Consumers are taking the leap and buying the biggest of big-ticket items of their lives, and this speaks to confidence,” Chris Rupkey, chief economist at MUFG Union Bank in New York, told Reuters.

MarketWatch said economists were wary of taking a single month’s figures too seriously because the data frequently get revised.

“In fact, the numbers are probably too good to be true, as I would be surprised if we continue higher from here,” MarketWatch said Stephen Stanley, chief economist for Amherst Pierpont Securities, wrote in a note.

“Nonetheless, even if there is a bit of a pullback in May or June, the trend is undoubtedly upward and will almost certainly remain so. Combined existing- and new-home sales broke the 6 million annualized pace mark in April for the first time since 2007.”

MarketWatch said first-quarter new-home sales numbers were revised higher and that sales through April have been at an average annual rate of 553,500, 10 percent higher than a year earlier.

Two days after the new-home sales numbers came out, the National Association of Realtors said pending home sales rose for the third consecutive month in April and reached their highest level in more than a decade.

NAR chief economist Lawrence Yun said major gains in the South and West sent pending sales in April to their highest level since February 2006.

"The ability to sign a contract on a home is slightly exceeding expectations this spring, even with the affordability stresses and inventory squeezes affecting buyers in a number of markets," Yun said. "The building momentum from the over 14 million jobs created since 2010 and the prospect of facing higher rents and mortgage rates down the road appear to be bringing more interested buyers into the market."

Bloomberg said the increase in contract signings — combined with the new-home and home-resale reports — was a good sign that home-buying activity will continue at a brisk rate during the spring selling season.

Inventories are limited, but the job market is steady and borrowing costs are low.

On Thursday the Commerce Department said orders for durable goods rose 3.4 percent in April, but MarketWatch said the report was not as positive as it sounded because a key measure of business investment fell.

The overall percentage gain was attributable to a surge in bookings for commercial jets. MarketWatch said orders for a category known as core capital goods — seen as a proxy for business investment — fell 0.8 percent and has dropped in five of the past six months.

Companies have been reluctant to invest more heavily because of a tepid global economy and falling exports.

“The outlook for durable goods looks like even more months of drifting nowhere,” Michael Montgomery, U.S. economist at IHS Global Insight, told MarketWatch.

On Friday we learned that first-quarter growth slowed less than the government initially thought. The Commerce Department said first-quarter GDP rose at a seasonally adjusted rate of 0.8 percent, up from its initial estimate of 0.5 percent.

Economists that The Wall Street Journal surveyed expected growth to be revised upward to 1 percent.

“First-quarter growth still looks disappointing, but the most recent data indicate that activity is bouncing back solidly in” the second quarter, Barclays economist Jesse Hurwitz told the Journal.

Profits after tax, without inventory valuation and capital consumption adjustments, rose at a rate of 1.9 percent from the fourth quarter, but profits were down 3.6 percent from the first quarter last year.

“This weakness in profits is likely contributing to the recent pullback in business spending and hiring growth,” J.P. Morgan Chase economist Daniel Silver told the Journal.

The final University of Michigan Consumer Sentiment Index for May, also released Friday, was 94.7, up sharply from 89 in April but a bit below the preliminary reading of 95.8 at mid-month.

“Consumers were a bit less optimistic in late May than earlier in the month, but sentiment was still substantially higher than last month,” Richard Curtin, chief economist for the university’s consumer surveys, said in a statement. “Indeed, there have only been four prior months since the January 2007 peak in which the sentiment index was higher than in May 2016, all recorded at the start of 2015.

“Despite the meager GDP growth, as well as a higher inflation rate, consumers became more optimistic about their financial prospects and anticipated a somewhat lower inflation rate in the years ahead. … The biggest uncertainty consumers see on the horizon is not whether the Fed will hike interest rates in the next few months, but the outlook for future government economic policies under a new president. This has increased their emphasis on maintaining precautionary savings, although the savings rate is not expected to increase much beyond its current level.”

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