Housing: The New Risk Factor

Housing remains a weak spot for the US economy, as suggested in yesterday’s news of a surprisingly large decline in new home sales for June. The report follows last week’s update on new residential construction, which also slumped more than expected last month. On a brighter note, existing home sales, which constitute the lion’s share of transactions for residential housing, posted a sharper-than-predicted gain for June. Nonetheless, housing’s overall profile looks mixed at best. Given this sector’s influential link with the business cycle, it’s fair to say that housing is a leading risk factor at the moment.

The optimistic view is that the moderately faster gains in payrolls lately will soon raise demand for housing. To the extent that’s a valid analysis, yesterday’s healthy decline in new jobless claims to an eight-year low provides fresh support for thinking positively. But while the growth in payrolls remains encouraging, wage gains look sluggish. Median earnings for workers rose a tepid 0.8% on a year-over-year basis in this year’s second quarter, the Labor Department noted in yesterday’s release. That’s close to the lowest pace in the last four years and down sharply from Q1’s nearly 3% rise. The quantity of jobs created may be improving, but it’s not yet clear that this improvement is fueling stronger earnings for workers. As a result, it’s still unclear if the revival in the labor market will deliver a quick round of support to the wobbly housing market.

For some perspective on the big-picture trend in housing, consider the year-over-year comparisons for starts and sales through last month in the chart below. New residential construction is still rising vs. year-ago levels (red line), but at a sharply reduced pace vs. last year’s torrid run. Meantime, sales are contracting, although existing sales (blue line) look poised to turn positive on a year-over-year basis–if the recent trend holds up.


Given the upbeat numbers from elsewhere in the economy it’s still reasonable to assume that the housing data will improve in this year’s second half. The cyclically sensitive manufacturing sector, for example, continues to post strong gains. “US manufacturers are enjoying a summer of scorching growth,” said Chris Williamson, chief economist at Markit, in yesterday’s release of the July flash estimate of the US Manufacturing Purchasing Managers Index. Meanwhile, the broad trend for the US economy continues to track positive. So far, however, the economy’s bullish bias has yet to show up in the housing sector. Deciding if this is a temporary affair or a darker sign for the economy will be a crucial issue for macro analysis in the weeks and months ahead.

Meantime, hope springs eternal. “We may see a late season summer push in housing activity,” Nela Richardson, chief economist at Redfin, a real estate brokerage, said earlier this week. “Inventory is picking up and mortgage rates are hovering around lows for the year, which make things a bit easier for first-time buyers.”

Perhaps, but for the moment the data suggests that headwinds prevail. “Housing has clearly been a notable area of persistent sluggishness beyond early-year weather disruptions,” Ted Wieseman, a Morgan Stanley economist, tells The Wall Street Journal.

The next opportunity for reassessing the outlook based on new data resumes on Monday, with the release of the Pending Home Sales Index (PHSI) for June. This monthly indicator is regarded as a leading indicator of housing demand, and so the recent round of increases in this benchmark implies that better numbers for housing generally are coming. PHSI jumped 6.1% to 103.9 in May, according to the National Association of Realtors (NAR). That’s the highest level since last September. “Sales should exceed an annual pace of five million homes in some of the upcoming months behind favorable mortgage rates, more inventory and improved job creation,” advised NAR’s chief economist. “However, second-half sales growth won’t be enough to compensate for the sluggish first quarter and will likely fall below last year’s total.”

What’s clear is that a disappointing report on Monday for PHSI won’t be easily dismissed. The housing market has run out of room to label weak numbers as noise.