Monday, August 3, 2015

Housing demand should bolster consumer confidence

Economics in a nutshell: Housing remains really strong and the soaring prices should help not only the residential real estate market but also consumer confidence and spending.

Housing demand should bolster consumer confidence

(AP Photo/Elise Amendola)
(AP Photo/Elise Amendola)

INDICATOR: May Existing Home Sales/Leading Indicators

KEY DATA: Housing Sales: up 4.2%; Median Prices (year-over-Year): up 15.4%/Leading Indicators: up 0.1%

IN A NUTSHELL: "Housing remains really strong and the soaring prices should help not only the residential real estate market but also consumer confidence and spending."

WHAT IT MEANS: Housing is the still the economy's leading light though how long that will be the case is anyone's guess. The huge back up in interest rates is likely to slow home sales at least to some extent. That might not happen for a while as people start buying before rates rise too much. Still, any moderation is unfortunate because demand through May was really solid. The National Association of Realtors reported that existing home sales rose above the five million units annualized sales pace for the first time in 3½ years and that was only because of government tax policies. The increase in demand was solid despite a modest drop in condo purchases. Single-family sales were strong. Geographically, every region posted a gain, so we are talking about broad based improvement. But the real eye-opener was the rise in prices. Median prices are up over fifteen percent in just one year while the inventory of homes for sale is down double-digit. That points to further increases in prices. With housing solid, it should not be a surprise that the Conference Board's Index of Leading Indicators rose again. While the increase was modest, it came on top of a robust gain in April, implying that the economy should continue growing.

MARKETS AND FED POLICY IMPLICATIONS: Housing right now is the Golden Goose, so why is the Fed trying to kill it? Well, that is not the intent. Unfortunately there has been an outsized reaction to Mr. Bernanke's comments that the end to quantitative easing could begin by year's end. The ten-year Treasury note is up 80 basis points since early May and 25 basis points since Tuesday. That will lead to mortgage rates rising further and the impact is not yet reflected in the housing sales numbers. Will the goose get cooked? Let's get through this crazy response the Fed Chairman's comments. Keep in mind, the Fed will have the pedal to the metal at least until December and probably a little longer. It will not take its foot off the pedal for at least a year. And even then, the foot will not go on to the brakes. Indeed, It is probably at least eighteen months before the Fed starts raising the funds rate and even then the process will begin slowly. Really, some people just have to chill out a bit. But traders never let deep thinking get in the way of a good knee jerk reaction so before anyone gets too depressed, wait a little longer and see how things play out. The economy has weathered Washington stupidity, European madness and Chinese self-dealing and it is likely to handle the current storm.

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About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel L. at .

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