Housing Starts dipped 4.8% last month, to a 1.155 million annual rate, while Building Permits slipped 4.1%, to a 1.223 million yearly rate. Before we get caught up in talk about the end of the housing recovery, let's note that most all the drop was in multi-unit starts, which, because of the size of those projects, are very volatile, month to month. Single-family starts were off just 0.5% in July but their trend continues to rise, up 10.9% year-over-year.
Multi-family starts are off 33.7% from a year ago but that just reflects a shift in the mix. In 2015, 35.7% of starts were multi-family. Last month, multi-family made up just 25.9% of all starts. This is good for the economy since each single-family home contributes about twice what a multi-family unit does to GDP. Finally, the EVP of an online real estate company explained why today's home prices are not near bubble-era: "while prices nominally have surpassed the 2006 peak, we're not talking about 2006 dollars. We've had 9 years of inflation. Home prices today have basically recovered to about where they were in 2004".
Review of Last Week
The news was dominated by the sound of political controversy in the U.S. and the fury of yet another instance of Islamic State terrorism, this time in Spain. Those things left investors a bit jittery, which, along with low summertime trading volumes, set the stock market up for a selloff. The Dow, S&P 500 and Nasdaq all slipped for the week. We monitor market performance because investor sentiment is a pretty good leading indicator for the economy. Some analysts felt last week showed that Wall Streeters are becoming impatient waiting for major elements of the President's pro-growth agenda.
Pro-growth measures are happening and although the promised tax cuts are not here yet, the economy is obviously improving. Retail Sales kicked up 0.6% in July and are up 4.2% compared to a year ago. The NY Empire Manufacturing Index shot up from 9.2 in July to 25.2 in August, its highest read in almost three years. Consumer discretionary spending is up solidly in areas from amusement parks and campgrounds to motorcycles and boats. Q2 corporate earnings are up 10.2% year-over-year, hitting double-digit growth for the second quarter in a row--plus, revenues are up 5.1%, their strongest performance in 11 quarters!
The week ended with the Dow down 0.8%, to 21675; the S&P 500 down 0.6%, to 2426; and the Nasdaq down 0.6%, to 6217.
It was an up and down week for bonds with prices finally settling little changed from the Friday before. The 30YR FNMA 4.0% bond we watch finished the week down .06, to $105.41. In Freddie Mac's Primary Mortgage Market Survey for the week ending August 17, national average 30-year fixed mortgage rates edged lower again.
Where are interest rates headed?
This Week’s Forecast
The big news for us will be the home sales reports for July. Wednesday, New Home Sales are expected to come in up for the month. Thursday, Existing Home Sales are forecast to be up nicely as well. Durable Goods Orders are predicted down from the prior month's gain but when you exclude the volatile transportation segment, they should show growth.
The Week’s Economic Indicator Calendar
Weaker than expected economic data tends to send bond prices up and interest rates down while positive data points to lower bond prices and rising loan rates.
Economic Calendar for the Week of August 21st – August 25th
Aug 23 10:00 New Home Sales
Aug 23 10:30 Crude Inventories
Aug 24 08:30 Initial Unemployment Claims
Aug 24 08:30 Continuing Unemployment Claims
Aug 24 10:00 Existing Home Sales
Aug 25 08:30 Durable Goods Orders
Aug 25 08:30 Durable Goods Orders - Ex Transportation
Federal Reserve Watch
Speculative Forecasting Federal Reserve Policy Changes in Coming Months:
There's a very slight probability the Fed will cut rates at one of the next few meetings. The probability of a December hike is now off the table, with the March meeting being the earliest forecast for higher rates.
Note: In the lower chart, a 4% probability of change is a 96% certainty the rate will stay the same.
Current Fed Funds Rate: 1.0%-1.25%
After FOMC meeting on:
Sep 20 1.0%-1.25%
Nov 1 1.0%-1.25%
Dec 13 1.0%-1.25%
Probability of change from current policy after FOMC meeting on:
Sep 20 4%
Nov 1 6%
Dec 13 43%
Where are interest rates headed?
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