Housing’s Weak Start For Q2 Is Probably Noise

April was a rough month for housing. For the first time in a year, housing starts and sales of new and existing homes declined for the monthly comparison. The weakness weighed on the year-over-year change, which slumped to an 18-month low. Given housing’s critical role for growth, the slowdown would be worrisome if other corners of the economy weren’t showing signs of strength. Nonetheless, a soft housing market isn’t easily dismissed for business-cycle analysis.

The optimistic spin is that the latest downturn is only a temporary setback, in part due to an unusually wet April that kept would-be buyers away. Inventory issues are reportedly a factor depressing sales too.

“Last month’s dip in closings [of existing home sales] was somewhat expected given that there was such a strong sales increase in March at 4.2 percent, and new and existing inventory is not keeping up with the fast pace homes are coming off the market,” says Lawrence Yun, chief economist at the National Association of Realtors. “Demand is easily outstripping supply in most of the country and it’s stymieing many prospective buyers from finding a home to purchase.”

Sales of newly built homes also fell in April, probably due to the payback effect — transactions in March were unusually strong. Whatever the reason, sales tumbled more than 11% in April vs. the previous month, the biggest monthly setback in two years.

Meanwhile, new residential construction fell last month… again. Housing starts slumped for a second month in a row, dropping 2.6% vs. the total for March. So far this year, starts have fallen in three out of four months.

Monthly comparisons can be noisy and so it’s useful to review the annual pace for a clearer measure of the trend. But the numbers also show a clear stumble on this front, based on the average year-over-year percentage change for starts and sales of existing and new homes. The average change for the three indicators decelerated sharply in April to a weak 1.0% rise, the softest increase in 18 months.

But some analysts counter that the big-picture for housing still looks encouraging. Home builders are certainly upbeat. The National Association of Home Builders/Wells Fargo Housing Market Index, which tracks sentiment in the industry, increased in May to the second-highest reading since the recession ended in 2009. “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward,” says the group’s chief economist, Robert Dietz.

MarketWatch.com today points to “9 signs the housing market will only get hotter in 2017.” Columnist Jeff Reeves advises that “after looking at the past few months of data, I remain convinced the housing market has nowhere to go but up.”

Perhaps the leading reason for staying optimistic on housing is the labor market. Although payrolls stumbled in March, growth picked up in April: the private sector minted 194,000 new jobs last month, a moderate gain relative to recent history. Meanwhile, layoffs continue to print at levels that are close to multi-decade lows.

“Labor market conditions remain robust and continue to tighten,” Ward McCarthy, chief financial economist at Jefferies LLC, said earlier this month.

Keep in mind, too, that recession risk remains low, according to spectrum of economic and financial indicators. As noted in last week’s update, the estimated probability that an NBER-defined downturn has started is virtually nil, based on numbers published through April.

The bottom line: despite weak housing data for April, the foundation for growth in the residential real estate market appears intact. Another weak run of numbers for May would challenge that analysis, but for now it’s reasonable to assume that last month’s slide isn’t the start of an extended downturn for housing.

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