Review of Key Economic Data Released in June 2018 that affects the Mortgage Industry
June was a busy month for Economic News – the US NOKO Summit, FOMC Meeting with an interest rate increase, strong gains in the labor market, mixed housing market data, lower GDP estimates, and new tariffs on Chinese goods. Trade, tariffs, and the potential for a Trade War seems to dominate the news lately. Is this the start of a Trade War or is it just hardball negotiating? With all the talk about tariffs on imported goods, people may have missed the talk about restrictions on the export of US technology. The concern is National Security, and it would restrict Chinese firms from buying US Technology and/or taking over US Tech firms. Why is a Trade War important to the Mortgage Industry? A Trade War could lead to a recession in 2019. During recessions the Fed typically lowers interest rates – or in this case, stops raising interest rates. Let’s do a quick review of other Key Economic Indicators and Data from June 2018 that are important to the Mortgage Industry and Mortgage Professionals.
Key Economic Data and Events in June
- The Federal Reserve raised interest rates for the second time this year.
- The Fed announced they plan to do 2 more rate hikes in 2018.
- The Unemployment Rate is the lowest it has been since 2000 at 3.8%.
- Inflation is increasing with the CPI at 2.8% for the last 12 months.
- The US and North Korea met for a Summit to discuss de-nuking and eliminating Economic sanctions.
- New tariffs were initially placed on $50 Billion of Chinese goods, but more could follow.
Interest Rates and Fed Watch
As expected, the Federal Reserve raised interest rates for the second time this year increasing the Fed Funds Rate from 1.75% to 2.0%. The decision to raise rates was unanimous among all the FOMC Members. They also changed their forecast for total rate increases in 2018 from 3 to 4. That means we can expect 2 more rate hikes before the end of the year. The Fed predicts the Economy will continue to grow despite higher interest rates. Inflation and unemployment are surpassing their targets and they don’t want the Economy to overheat. They also expect the new Tax Cuts will boost the Economy – but that happens with a lag and will materialize later this year. Fed Watchers expect the additional rate increases to occur in September and December.
Federal Reserve Targets – 222
- Inflation 2.8% CPI for the last 12 months
- Wage Growth 2.7% for the last 12 months
- GDP Growth 2.8% annualized rate for the last 12 months
Housing Market Data June 2018
Mortgage Professionals know too well the issues currently facing the Housing Market. While Prices are way up and homeowners gain additional equity, buyers are faced with affordability problems, bidding wars, low inventory, higher interest rates, and higher Real Estate Taxes. It’s not just the purchase market that is suffering; renters are having a difficult time finding an affordable apartment. Even as wages continue to increase at a healthy pace, the Cost of Shelter – buying or renting – is outpacing those wage increases. At what point does a “Shelter Problem” become a “Shelter Crisis”? Some people are starting to worry about Housing and feel we are headed for a real crisis. Is this a repeat of 2007? I hope not.
Housing Market Economic Indicators from June 2018
- Existing Home Sales (closed deals in May) fell 0.4% to an annual rate of 5,430,000 homes, now down 3.0% in the last 12 months. The median price for all types of homes is now $264,800 – up 4.9% from a year ago. The median Single Family Home price is $267,500 and $244,100 for a condo. First Time Buyers were 31%, Investors 15%, Cash Buyers 21%. Homes were on the market an average of 26 days, and 58% were on the market for less than a month. Currently, 1,850,000 homes are for sale – down 6.1% from a year ago.
- New Home Sales (signed contracts in May) rose 6.7% to a seasonally adjusted annual rate of 689,000 units. Year over year New Home Sales are up 14.1%. The median price of a new home is $313,000, and the average sales price is $368,500. Inventory of New Homes for sale is 299,000 – a 5.2 month supply.
- Pending Home Sales Index (signed contracts in May) fell 0.5% to 105.9 from 106.4 in April.
- Housing Starts (excavation began in May) rose 5.0% to a seasonally adjusted annual rate of 1350,000 units – now up 20.3% YoY. Single Family Housing Starts rose 3.9% to an annual pace of 936,000 units – up 18.3% YoY. Multifamily Starts rose 11.3% to 404,000 units.
- Building Permits (issued in May) fell 4.6% to an annual rate of 1,301,000, an 8.0% increase YoY. Single Family permits fell 2.2% to 844,000 units, and Multifamily permits fell 8.5% to 421,000 units.
- New Home Sales, Housing Starts, and Building Permits are notoriously volatile indicators. They carry a lot of statistical uncertainty from constant revisions, changes to the seasonal adjustment formula, and are heavily influenced by weather.
- S&P/Case-Shiller Home Price Index rose 0.2% in April. The 20 City Composite index is now up 6.6% in the last 12 months.
- FHFA Home Price Index rose 0.1% in April, now up 6.4% year over year.
Labor Market Economic Data Released in June 2018
The Jobs Report showed the Economy added 223,000 new jobs in May – the Unemployment Rate is at an 18 year low. The last 2 Jobs Reports from April and May signal a very healthy Labor Market. Along with this good news is the downside: employers are having trouble finding workers to fill job openings. If you look closer at the data, you’ll notice that the number of job openings actually exceeds the number of unemployed people. So if all the unemployed people took all the job openings – no one would be unemployed. Sorry, but it’s not that simple. The reality is most of the unemployed people lack the skills employers are looking for – that’s why many are unemployed. Economists call it “Structural Unemployment” but the popular term is the “Skills Gap“. One area of high demand for workers is the Construction Industry. Builders are struggling to find skilled workers to build homes. Which is exactly what we need – more homes. More home means more mortgages.
- The Economy added 223,000 new jobs in May.
- The Unemployment Rate fell to 3.8% in May – the lowest since April 2000.
- The Labor Force Participation Rate fell to 62.7% in May.
- The Average Hourly Wage rose 0.3% in May – up 2.7% in the last 12 months.
Inflation Economic Data Released in June 2018
Consumer Inflation keeps marching higher as the CPI and PPI rose substantially in May – with energy prices and shelter costs leading the way. What was up and what was down on the Consumer side? Energy prices up 0.9%, gasoline up 1.7%, shelter costs up 0.3%, medical care up 1.3%, lodging up 2.9%, new vehicles up 0.3%, used car and truck prices down 0.9%, furniture down 0.4%, food prices unchanged. Shelter costs are now up 3.5% in the last 12 months – the biggest increase since 2007. This faster pace of inflation will give the Fed more reason to continue their interest rate increases throughout the year.
- CPI rose 0.2%, now up 2.8% in the last 12 months – the most since February 2012.
- Core CPI (ex-food & energy) rose 0.2%, now up 2.2% in the last 12 months.
- PPI rose 0.5%, now up 3.1% in the last 12 months.
- Core PPI (ex-food & energy) rose 0.3%, up 2.4% in the last 12 months.
GDP Economic Data Released in June 2018
The 3rd guesstimate for 1st Quarter 2018 GDP showed the Economy grew at a 2.0% annualized rate (2.2% expected). The GDP growth was revised down based on lower consumer spending, exports, and inventories. This is the last revision for the 1st quarter – which is typically the slowest quarter of the year. The early estimates for 2nd Quarter GDP is much higher than 1st quarter – around 3.8 to 4.5%. The new tax cuts will spur more growth but that happens with a lag. Economists still expect Economic growth to accelerate in the last half of the year and exceed 3.0% for all of 2018. Remember that each quarter has 3 revisions for GDP, so all the revisions are more like moving targets or guesstimates.
Consumer Economic Data Released in June 2018
After a slow winter quarter, Consumers feel great about the Economy and are on a buying binge. Retail Sales rose 0.8% – much higher than the 0.4% Economists expected. What were they buying? The increase was led by gas stations, restaurants, bars, building materials, and general merchandise. Just about every category was up except furniture was down. Why are they so optimistic? Higher wages, low Unemployment, and more disposable income from the Tax Cuts.
- Retail Sales rose 0.8% in May. For the year, Retail Sales are up 5.9% YoY.
- PCE – Personal Consumption Expenditures rose 0.2% in May, up 4.6% year over year.
- Consumer Confidence fell to 126.4 from a revised 128.8 – still close to a 17 year high.
Energy and International Economic Data and Events
- Oil Prices rose as the US urged other countries to stop buying Iranian oil. OPEC pledged to increase output as oil prices are now trading about $74 a barrel for Brent Crude.
- Russian and Chinese relations are getting closer: China signed a deal to have Russia build 4 new Nuclear power plants in China. Did they forget about Chernobyl?
- The US is moving forward with a 25% tariff on $50 Billion of Chinese goods. Is this the start of a Trade War or hardball negotiating tactics?
- US imposes sanctions on Russia for cyber attacks and Russia vows retaliation.
- Trade tensions with Canada: Canada and the US impose new tariffs on each other while they agree to continue NAFTA negotiations.
This Economic Commentary is written to be a succinct summary of the key Economic Indicators and Economic Data that influence the Mortgage and Real Estate Industries. It is written for Mortgage Professionals that need to stay current on Economic Information but don’t have hours to research and analyze Economic Data. Feel free to share this with a friend or colleague in the Mortgage or Real Estate business. If you would like this Economic Calendar and Commentary emailed to you at the beginning of each month, click here.
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Mark Paoletti, MPaoletti@MortgageElements.com,
For a PDF copy of the Mortgage Economic Calendar for July 2018 Click Here.