INDICATOR: January New Home Sales
KEY DATA: Sales: +7.9%; Over-Year: +18.6%; Prices (Over-Year): +14.0%
IN A NUTSHELL: “The warm weather has really heated up the housing market.”
WHAT IT MEANS: Some may call climate change a hoax, but to builders, it is the greatest thing since sliced bread. In January, new home sales skyrocketed to their highest level since July 2007. Demand surged in the Midwest and West, was up solidly in the Northeast but fell in the South. But once again, you have to look at the numbers with some caution. First of all, the gains over the year were clearly impacted by the extremely warm weather. The increases from January 2019 to January 2020 in the Northeast, Midwest and West were all between 45% and 50%. Really, does anyone believe that weather didn’t play a huge part in those surges? When there is little snow and the cold weather isn’t so cold, people can visit the construction sites and builders can build so it is a lot easier to sell homes under construction. Prices jumped as a greater proportion of sales were for homes above $400,000.
MARKETS AND FED POLICY IMPLICATIONS: What worries me about the apparent exuberance in the housing market is that the demand is likely being pulled forward because of the weather. The outsized gains from the previous year for so many indicators are warnings that the strength may not be sustainable. Thus, while first quarter growth might be hyped by strong housing construction, it could be matched by a major turnaround in the spring and summer. And if builders do what they often do, which is assume the good times are here to stay, then we could run into some real problems in the sector as we go through the second half of the year. With the level of supply, as measured by months, low, I would not be surprised if builders continue to ramp up starts. February has been another warm month and the construction data should be really good. I just worry that the sector could be getting ahead of itself. As for investors, the story remains the coronavirus. It is not clear how long it will take for a vaccine to be developed and become universally available. The estimates I have heard range up to a year or even longer. The implication is that this is not going away anytime soon and each time a new outbreak occurs, expect the markets to react strongly. Thus, the efficient but often irrational markets could be volatile for quite a while. The Fed is likely to continue to put out the word that it needs to watch and wait, not react. Since interest rate changes don’t impact the physical health of the world, that makes sense. As for the mental health of investors, well the Fed found the placebo effect worked well last year so it just might try it again this year.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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