PMC Weekly Review - August 19, 2016

Macro Commentary – Is Housing Back?

Tuesday’s Commerce Department release of the July housing starts and building permit figures, which touched one of their highest levels since the recession, begs the question: Has housing finally recovered to pre-recession levels? The US Census Bureau report issued on Tuesday recorded housing starts at 1.211 million for July, a 2.1% rise from the June figure, and higher than the consensus of 1.180 million. The July figure is also just shy of the post-recession high-water marks recorded this past February and June 2015, both which came in at 1.213 million. Building permits for July were more muted (and remained stable from the prior month), but other data, such as housing prices and the number of privately-owned housing units under construction, are still hitting new highs since the recession. A report released on Monday also showed rising homebuilder confidence.

Tuesday’s positive news from Home Depot, one of the nations’ leading home improvement superstores, reported a 9.3% gain in its quarterly profit and an increase in its full-year earnings guidance. The company cited low interest rates and a strengthening labor force that are driving the housing sector higher. Sales of big-ticket items (those over $900), such as appliances and heating and air conditioning products, are helping the company’s core business. But not everyone in the home improvement industry is fairing as well as Home Depot. Competitor Lowe’s reported growing (but weaker-than-expected) numbers on Tuesday, attributing its smaller store footprint in the western United States as one reason for the lower figures.

Digging deeper into the housing start figures, the numbers are broken into two categories: single family and multi-family housing starts. The latter showing the strongest growth on a percentage basis: a 5% increase for the month of July, indicating that builders are responding to the demand for rental properties vs. single-family homes. A large-scale consumer preference shift away from homeownership would be unattractive to many economists, as home creation is a large contributor to the economy.

So, is the housing market back to pre-recession levels? Actually, it is not. July’s housing starts figure was roughly half of the pre-recession peak. This could be a good thing, in that lenders are being more restrictive in granting loans to borrowers, but it also could indicate homebuilders’ caution about both the immediate and future expectations for the economy. Consumer demand is certainly apparent, as housing prices are close to touching pre-recession levels, but supply must catch up before we witness any semblance of the strong, pre-recession housing market.

Solving the supply dilemma could significantly boost the current muddled economic growth we’ve experienced, and could create ripple effects across several sectors. But for now, we’ll just have to wait and watch for a clear catalyst to emerge.

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