Economical Updates May 20, 2016

An Economic Bright Spot

Both Freddie Mac and Fannie downgraded their forecasts for 2016 GDP growth this week, following a first quarter in which the economy, in Freddie Mac’s words, “sputtered out of the gate.” But while Fannie cut back GDP predictions 1.7% and Freddie to 1.8% (from first of the year projections of 2.2 and 2.0 respectively) the economists from both companies used the same words about housing; the “bright spot” in the economy.

The GDP was impacted by nonresidential fixed investment, which dropped 5.9% on a seasonally adjusted annual basis, the biggest downturn since 2009. Meanwhile, Freddie Mac says housing “remains on track for the best year in a decade with residential investment growing at an annual rate of 14.8% in the first quarter.”

The company thinks investors will continue to flock to the safety of Treasury notes, keeping interest rates low through the year. Freddie cut its second quarter forecast by 10 basis points and both the third and fourth by 20 basis points. The result will bring the 30-year fixed-rate to 4.1% by the fourth quarter, 4 basis points higher than the Q1 average.

Yet as we went to press, the Fed’s April meeting minutes signaled a strong possibility of a June rate hike if “hiring and growth continue to strengthen and inflation shows signs of accelerating.”

The big housing news was a rebound in residential construction numbers. After a dismal March in which permits tumbled 7.7% and housing starts were down 8.8% both indicators at least partially recovered.

The Census Bureau and Department of Housing and Urban Development estimated that permits were issued at a seasonally adjusted annual rate of 1.116 million, a 3.6% monthly increase, while starts rose 6.6% to a rate of 1.172 million. The numbers were higher than expected–analysts had put both in the vicinity of 1.130 million–but were still down from last April’s numbers; permits by 5.3% and starts by 1.7%.

The West is dragging on the national numbers. Permits rose slightly in the region in April but were down 3.6% from April 2015 and housing starts fell by 10.0% for the month and a whopping 24.7% compared to a year earlier.

Home builders continue to reflect unease about their business. The May Housing Market Index from the National Association of Home Builders (NAHB) held steady at 58 for the fourth straight month as builders continue to see little change in market conditions and buyer traffic well below their expectations. There was a 3-point bump however in builders’ view of market conditions six months from now. This is an index that has always survived on optimism.

And so do we. Next week we get to see if that is justified by existing, pending and new home sales from the peak of the spring market.