Week of July 15th, 2024 in Review

TECHNICALS
Builders Down Bad

In a not-so-surprising development, builder sentiment and SFR starts (meaning new homes are being “started”) are lower monthly. Rates are the root cause.

Lower inflation (covered in last week’s technicals), higher unemployment readings, and a slowing economy all signal to Jerome Powell that “it’s time” to cut rates. It's likely to happen in September.

What to tell your clients: Help is on the way in the form of rate cuts, but not so much in construction inventory. This means that we’re back in the familiar dance of “Should I wait for rates to come down or buy now and refinance later?”

We all know the answer. If you can afford the payment, buy the house. Don’t wait for the competition to get hot. The prices will rise, and monthly savings from a lower rate will be hamstrung by the higher prices. All the while, you’ve been renting (wasting money), trying to “time” the market. Just do it.

🔍 Home Builder Sentiment Held Down by Higher Rates

Confidence among home builders remains below the key breakeven threshold of 50, per the National Association of Home Builders (NAHB). The Housing Market Index dropped 1 point to 42 in July, marking the third consecutive monthly decline and the lowest reading since December.

Higher rates continue to dampen sentiment. Scores over 50 on this index, which runs from 0 to 100, indicate most builders feel confident about the current and near-term housing market outlook, whereas lower readings signify less optimism among builders.

📊 Bottom Line:

• 📉 All three index components (buyer traffic, current and future sales expectations) remained below 50.

• ⬆️ NAHB Chair Carl Harris noted that “the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data are showing signs of easing.”

🔨 Construction Activity Boosted by Multi-family Projects

After a disappointing May, new home construction ticked higher in June. Housing Starts and Building Permits both came in above estimates. However, the increase was led by a boost in multi-family projects, as starts and permits for single-family homes both moved lower.

📊 Bottom Line:

• 🏘️ Softer than expected construction activity this spring could limit much-needed supply down the road, especially among single-family homes.

• 💡 This bodes well for appreciation and shows that opportunities remain to build wealth through homeownership.

🛒 Retail Sales Remain Flat

Retail Sales stayed flat in June, which was better than the expected outright decline. Sales in May were revised upward from a 0.1% gain to a 0.3% gain compared to April.

📊 Bottom Line:

• 🛑 While better than estimates, consumers are spending more cautiously in the face of rising unemployment and a slowing labor market.

• 🏦 The Fed will closely watch future Retail Sales reports, as the strength of our economy will impact their monetary policy decisions this year.

💼 Initial Jobless Claims Hit 5-Week High

Another 243,000 people filed new unemployment claims in the latest week, marking an increase of 20,000 from the previous week and tying the highest level since early June. Continuing Claims also rose by 20,000, with 1.867 million people still receiving benefits after filing their initial claim.

📊 Bottom Line:

• 📈 The pace of layoffs continues to move higher, as does the number of people already collecting benefits.

• 📅 The high reading of 243,000 initial unemployment claims could point to weaker job growth when July’s report is released on August 2.

💡 Latest LEI and Beige Book Suggest Slowing Economic Activity

The Conference Board released their latest Leading Economic Index (LEI), which takes a broad look at the economy and tracks its near-term direction. June saw a 0.2% drop, following May’s upwardly revised 0.4% decline.

📊 Bottom Line:

• 📉 “The US LEI continued to trend down in June, but the contraction was smaller than in the past three months,” explained Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators.

• 📉 The Conference Board predicts “economic activity is likely to continue to lose momentum in the months ahead,” with cooling consumer spending pushing “GDP growth down to around 1% (annualized) in Q3 of this year.”

This correlates with the Fed’s latest Beige Book, a survey of economic conditions around the country. Five of the Fed’s 12 districts reported flat or declining economic growth, up from only two districts six weeks ago.

🗓️ What to Look for This Week

• 🏡 More housing reports are ahead, with June’s Existing and New Home Sales releasing on Tuesday and Wednesday, respectively.

• 📈 Look for the first reading on second-quarter GDP and the latest Jobless Claims on Thursday.

• 💰 Friday brings the most crucial report of the week via the Fed’s favored inflation measure, Personal Consumption Expenditures.