INDICATOR: August Existing Home Sales and September Philadelphia Fed NonManufacturing Survey
KEY DATA: Sales: +2.4%; Prices: +11.4%; Inventory: 3.0 months/ Phila. Fed (NonMan.): +6.4 points: Expectations: +14 points.
IN A NUTSHELL: “With existing home sales hitting the highest level in nearly 14 years, it is clear the housing market is on fire.”
WHAT IT MEANS: Remember the housing bubble? Of course you do, even if you wanted to forget it. Well, housing demand is moving back toward those levels. The National Association of Realtors reported that existing home purchases rose moderately in August after having surged the previous two months. The level may still be well below the peak posted during the housing bubble, but it is still historically high. Sales were up fairly modestly in most regions, but jumped by double-digits in the Northeast. Interestingly, condo/coop sales rose faster than single-family purchases. And you thought density was out. Home prices are skyrocketing, reaching a new high. That occurred, in no small part, because the number of homes on the market is declining. It is at a ridiculously low three months and only 2.8 months for single-family homes, about half of what it should be.
The Philadelphia Fed’s Non-Manufacturing Index increased solidly in the first half of September. The details, though, were a bit mixed. Order growth moderated and backlogs increased sluggishly. But hiring was on the rise and firms are spending on plant and equipment again. But maybe the best news in the report was the sharp jump in expectations. Optimism about the future may not be irrationally exuberant yet, but it is high.
IMPLICATIONS: For three months now, the housing market has posted big gains. With the August home sales numbers at those we saw in 2006, it is fair to raise the issue of whether we are moving into another bubble. That is not likely the case.
We likely have two factors at work that are temporarily causing the sales level to surge. The first is that sales cratered in the spring and there is some catch-up going on. Second, there is the sudden urge to escape high-density living that is adding to the demand. The catch-up should start fading soon, if it hasn’t already.
Whether the change in location preferences is just a fad or a long-term trend is right now uncertain. Those who were thinking of moving before the pandemic hit are probably rushing out to do so.
Those who may want out because of a fear of density, but are not in position to move right, away are the ones we need to watch. They represent a level of demand that may not have been there before and could allow the market to stay solid, even as the temporary factors fade.
Add that to the Fed’s intention to keep rates low for an extended period and you have the makings for a solid but not excessively enthusiastic market for a quite a while. As for investors, housing is a plus, but what about the rest of the economy? The Philadelphia Fed’s report points to good, though not great, growth in the nonmanufacturing portion of the economy as well. And the Chicago Fed’s National Activity Index, which came out yesterday, indicated that the U.S. economy began its expected growth moderation in August. Activity was still above trend, but it is also trending downward.
I keep saying that we need to look past the second quarter collapse and the third quarter surge and see what growth may look like for the year starting in the fourth quarter.
Right now, it looks like it will slowly decelerate back toward sustainable growth. What is not clear is how rapid that deceleration will be.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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