US: Housing market, consumer confidence, Yellen, Puerto Rico
The US housing market appears to be slowing, but consumer confidence remains largely intact. Janet Yellen reinforced the markets’ conviction of a third rate hike in December. And a week after Hurricane Maria hit, Puerto Rico lies in ruins. We maintain our forecast of 2.0% GDP growth for 2017, and 2.3% in 2018.
Recent data about the US housing market has shown a decay over the past few months.
1. Unit sales of new homes declined for the second consecutive month in August falling -3.4% to -1.2% y/y. It is unclear how much hurricanes Harvey and Irma affected the results since sales are only broken out by region. Sales in the South, which is by far the biggest region, fell 4.7% to a minus 9.2% y/y rate. But sales fell in West and Northeast as well, declining 2.6% and 2.7% respectively. Prices of new homes nationwide fell a sharp -6.2%, the fifth decline in eight months, to only 0.4% y/y.
2. Similarly unit sales of existing homes, about 10 times the volume of new homes fell 1.7% in August, the third consecutive decline putting the y/y rate to only 0.2%. Again sales fell 5.7% in the South, but they also fell 4.8% in the West. Those losses were partially offset by gains in the Northeast and the Midwest Prices of existing homes nationwide fell for the second consecutive month, dropping 1.8% to 5.6% y/y.
3. Housing starts fell for the sixth time in eight months to a 1.4% y/y rate.
4. Housing permits did provide the once piece of positive news, gaining 5.7% on the month to 8.3% y/y
Despite the recent decline in prices, affordability remains an issue, especially for first time buyers who have been unable to save enough for the down payment. Since the bottom of the housing market in late 2011 - early 2012, prices of existing homes have risen 64%, prices of new homes have risen 40%, but wages have risen a mere 13.5%. In addition, realtors have been complaining for years about the lack of supply on the market, saying it’s an impediment to growth. As shown on the chart, the supply is not that far from the long-term average, but it is one-half to one-third the supply during the bubble years.
Consumer confidence slipped -0.6 points to 119.8 Aside from the recent high in March, it hasn’t been this high in almost 17 years. Confidence in Texas and Florida fell substantially after the hurricanes. Similarly the assessment of current conditions fell -2.3 points while the assessment of future expectations gained +0.5 points. Continued consumer confidence is needed to support spending.
Janet Yellen gave a speech on Tuesday where she reinforced the Fed’s projected rate hike in December, saying “It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent...” and that the Fed “should also be wary of moving too gradually.” After the speech, financial markets raised the probability of a December hike from 73% to 80%.
Fiscal update
The latest, and perhaps last plan to repeal and replace Obamacare has gone down to defeat in the Senate.
Tax reform is up next as a unified proposal from the House, the Senate, and the Administration is set to be revealed this week.
Puerto Rico
Finally, the island of Puerto Rico, home to 3.4 million American citizens is still in a state of ruin and faces a “humanitarian crisis” in the words of San Juan Mayor Carmen Yulin Cruz. A week after Hurricane Maria hit, most of the island is still without power or communications. Supplies of food, medicine, and fuel are low and dwindling. Roads remain impassible. And The Guajataca Dam is failing, putting 70,000 people at risk. The Hurricane will likely devastate the economy which had already been in recession since 2005 due to widespread government corruption, manufacturing leaving the island because of the expiration of tax breaks, and a “brain drain” of 11% of the population which has left the island over the past decade for the US mainland. The government had to declare a form of bankruptcy earlier this year. About half of the island’s economy is driven by manufacturing, and half of that is in the pharmaceutical or bio-engineering sectors - Puerto Rico produces 16 of the top 20-selling drugs in the mainland United States.
For the third time this year, we keep truly beleaguered Americans in our thoughts.
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