Among the countless economic variables that the Federal Reserve routinely parses for inspiration on what to do next in monetary policy, real estate’s numbers no doubt carry significant weight these days. The housing boom in recent years has delivered a more than a little zest to the economy, courtesy of the ample liquidity that the central bank has supplied in years past. As such, if there’s any chance that the Fed would cease and desist in its current round of interest-rate hikes, real estate trends are likely to deliver an early warning.
What, then, should we make of yesterday’s release of May’s housing starts, which posted a 5.0% rise over April’s numbers–the first month-over-month increase since January? Is the real estate boom resuming? Is the former slowdown that we’ve been hearing so much about over?
Not necessarily. As Asha Bangalore of Northern Trust observes in a research note to clients yesterday, “Two-thirds of the increase in [housing starts in] May was from new construction of multi-family units, which tend to show a larger degree of volatility compared with the starts of single-family units. The rebound in May is tentative, at best. News from the housing market is marked with stories of declining orders and lay offs.”
In fact, confidence among home builders has continued to drop precipitously this year, as tracked by the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The latest installment for June, released on Monday, maintained the trend: HMI dropped to its lowest level since 1995, NAHB reported. The cause? Rising mortgage rates, higher price hurdles for buyers, and the retreat of investors/speculators from the marketplace, according to NAHB’s press release. Adding to the gloom was the news that the fall in builder confidence was “broad-based and registered in every region this month.”

Meanwhile, UCLA Anderson Forecast, a research outfit in Los Angeles, says that a real estate slowdown is underway in California (the biggest real estate market in the U.S.) and the nation overall. But optimism nonetheless springs eternal. In a press release issued today, discussing the group’s just-published second-quarter property report, UCLA Anderson Forecast Director Edward Leamer is quoted as saying: “We do not predict a recession, nor do we predict a substantial decline in average nominal home prices.” Ratcliff goes on to explain the reasoning for this sunny outlook. “There is not enough vulnerability in the usual sources of employment loss to create a recession, and the historical record suggests that average home prices do not usually fall without this kind of job loss.”
Indeed, the 4.6% unemployment rate for May is the lowest since July 2001. If there’s an employment speed bump coming, it’s not obvious in the jobless rate. But countering that trend is the rise in the nation’s nonfarm employment last month–the lowest since last October, representing a sharp slowdown from the strength that previously graced the employment reports in 2006. The nation’s capacity to produce new jobs appears to be tired. Another month or two of confirming data and the markets may conclude that a recession is in fact imminent.
But that’s a debate for future economic releases. In the here and now, another reality dominates. Futures traders, at least, aren’t being swayed from their prediction that the Fed will raise rates by another 25 basis points next week, when the FOMC meets next on June 28/29. The July Fed funds contract is priced in anticipation for a 5.25% Fed funds as of next Thursday.
As real estate slowdowns go, the current one (if in fact that’s what we have) is so far mild, at least in the minds of traders. The question, then, is what, if anything, might change the mindset in the land of futures? Potential candidates include tomorrow’s update on jobless claims, and Friday’s durable goods report. With another number always just around the corner, greed or fear are in theory never far behind.