“March – In Like a Lion and Out like a Lamb” – I’ve been hearing that expression all my life. March usually starts off with ferocious winter weather but ends with mild spring like conditions. March 1st is usually a happy day because it signals that the end of winter is near. In 12 days most of us will set our clocks ahead an hour to start Daylight Saving Time. Then March Madness starts and poof – it’s Spring.
February in Review
Recapping the major Economic Data releases that affect the Mortgage & Real Estate business:
- Consumers and Small Businesses are confident about the economic future.
- Housing started the year strong continuing last year’s trend.
- Inflation is heating up but GDP growth is still lackluster.
- The 1st FOMC Meeting of 2017 (Feb 1) ended with no change in interest rates – but….
- The next FOMC Meeting is March 14 – 15 and a rate increase may occur.
Interest Rates and Fed Watch
Fed Chair Yellen testified before Congress in February and remarked that it would be “unwise” to wait too long to increase interest rates. Other Fed members have also reiterated that a rate hike could come at any time. With the CPI and PPI starting the year higher than expected, a rate hike in March is definitely on the table. The latest outlook from Fed Watchers: there is over a 50% probability the Fed will raise the Fed Funds rate at the March 15 FOMC Meeting – but that’s 2 weeks away and a lot can happen in 2 weeks.
How is the Fed’s 2-2-2 Target looking for February?
Fed 2-2-2 Target (2.0% Inflation, 2.0% Wage Growth, 2.0% GDP Growth)
Inflation 2.5% CPI for the last 12 months
Wage Growth 2.5% for last 12 months
GDP Growth 1.9% for 2016 (2nd revision – 3rd revision to come)
The January Jobs Report results were better than expected but Wage Growth increased only slightly. At this point, the Fed is closely watching Wage Growth more than job growth when making monetary decisions.
- The Economy added 227,000 new jobs during January (200,000 expected). Employers are optimistic about the upcoming year and started hiring employees in response to that optimism.
- The Unemployment Rate increased slightly to 4.8% from 4.7% last month.
- The Average Wage rose 0.1% in January pegging annual wage growth at 2.5% for the last 12 months.
Consumer prices started the year with a healthy bump upward, much higher than Economists expected. Energy, health care, and housing (rent) are up as usual. Gas prices alone increased 7.9% in a month, making up a large portion of the CPI and PPI increases.
- CPI rose 0.6% in January (0.3% expected), up 2.5% in the last 12 months.
- Core CPI (ex-food & energy) rose 0.3% (0.2% expected), up 2.3% in the last 12 months.
- PPI rose 0.6% (0.3% expected), up 1.6% in the last 12 months.
- Core PPI (ex-food & energy) rose 0.4% (0.2% expected), up 1.2% in the last 12 months.
The second guesstimate for 4th Quarter 2016 GDP showed the economy grew at a 1.9% annualized rate (2.1% expected). This number pegs 2016 GDP growth at 1.9% – just below the Fed’s target of 2.0%. There will be one more revision next month before we know where 2016 GDP actually lands. Why the low number? Lower government spending, lower business spending, and lower exports. You can blame the strong dollar for the low exports. GDP is a notoriously hard number to pin down. That’s why each quarter has 3 revisions. It’s a moving target so all the revisions are more like guesstimates.
It looks like the Consumer is very happy and still on a spending spree. Retail Sales rose substantially and the Consumer Confidence Index hit a 15 year high. Why? Optimism surrounding the new administration’s promised stimulus policy. What are Consumers buying? Sporting Goods, electronics, appliances, and building materials. The strong dollar makes imported goods cheaper – just look at how prices of large screen TVs have decreased in the past year.
- Retail Sales rose 0.4% in January (0.1% expected). For the year, it’s up an impressive 5.6%.
- Consumer Sentiment Index fell to 96.3 from 98.5, it’s 10 year peak.
- Consumer Confidence rose to 114.8 from 111.8 last month.
- Consumer Spending rose 3.0% (annualized).
International & Misc
Greece is back in the news – again. They need another cash infusion by July or risk defaulting – again. It’s the same movie played over and over for the past few years. Greece threatens default, the EU gives them money, Greece is happy for 18 months. Then…..Greece threatens default….. You get the picture, but watch out this time. This next Greek financial crisis might materialize about the same time the Fed is holding the June FOMC Meeting where many Fed watchers are expecting a rate hike. If this creates a shock in the Eurozone, then the Fed may pass on a rate hike.
The final numbers trickled in for 2016 and they confirm what we already know – 2016 was the best year in housing since the Financial Crisis. On top of that, 2017 got off to a great start with Home Sales continuing their upward trajectory. The momentum in housing continues, bolstered by optimism of an improved economic outlook from Trump’s pro-growth policies. However, the drop in Pending Home Sales could be an ominous sign. Housing is still plagued with some reoccurring structural problems that are difficult to fix: affordability, regulation, skilled labor shortage, and Locked-in Homeowners.
Housing Data released in February:
- Existing Home Sales (closed deals in January) rose 3.3% to an annual rate of 5,690,000 homes. The median home price for all types is now $228,900 – up 3.8% from a year ago. The median price for Single Family homes is $230,400 and $217,400 for condos. 1st Time Buyers were 33%, Investors 15%, Cash Buyers 23%. Homes are on the market an average of 50 days. Currently, 1,690,000 homes are for sale.
- New Home Sales (signed contracts in January) rose 3.7% to a seasonally adjusted annual rate of 555,000 units. The median price of a new home is $312,900 and the average sales price is $360,900 – down from $379,000 in December. The price drop is attributed to a rush of buyers in December to lock in low interest rates. There are now 265,000 new homes for sale.
- Housing Starts (excavation began in January) fell 2.6%. The data is mixed. Multi-family starts fell 10.2% while Single Family Starts rose 1.9% month over month. For the last 12 months Single Family Starts are up 6.2% and Multi-family Starts are also up 19.8%.
- Building Permits (issued in January) rose 4.6%. Multi-family permits rose a whopping 19.8%. Single Family permits fell 2.7%.
- Remember that New Home Sales, Housing Starts, and Building Permits, are notoriously volatile with a lot of statistical uncertainty from constant revisions and changes to the seasonal adjustment formula.
- FHFA Home Price Index rose 1.5% in the 4th quarter of 2016 – home prices are now 6.2% higher than a year ago according to FHFA.
- S&P CoreLogic Case-Shiller Home Price Index – The 20 City Composite Index rose 5.6% from December 2015.
- Pending Home Sales Index (signed contracts in January) fell 2.8% to 106.4 from 109.5 in December. Why the drop? Low inventory and affordability issues.
This month’s Economic Calendar is attached as a PDF. You can view it on your computer, or print it out to post it in a visible spot so you won’t be surprised by interest rate changes due to the release of economic information. Click Here if you want a full 12 months of the 2017 Economic Calendar. You are welcome to share this with a friend or colleague. They can click here to sign up for the Monthly Calendar and Commentary.
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