INDICATOR: June New Home Sales and May Housing Prices

KEY DATA: Sales: -5.3%; Prices (Over-Year): -4.2%/ FHFA Home Prices: +0.2%; Over-Year: +6.4%

IN A NUTSHELL: “And the housing beat down goes on, and the housing beat down goes on.”

WHAT IT MEANS: My apologies to Sonny Bono, but if there is any sector that is susceptible to getting hurt by the actions of the Fed and the rise in materials costs it is the housing market. We saw that it in the sales data quite clearly this week. Previously, it was reported that existing home demand eased in June and today the data showed that new home sales also tanked during the month. The level of new homes sold was the lowest since last October. The only region where there was strength was the Northeast, similar to the existing home report. For new homes, though, the other three regions posted declines. Meanwhile, prices are softening. Maybe. While the median prices was down from June 2017, it was likely due to the shift in sales toward lower-priced product, not an actual decline in individual home prices. This June, half the homes sold were for less than $300,000. Last June, that group accounted for 46% of the newly constructed home sales. The sales came from the middle category, $300,000 to $500,000, which saw its share drop from 37% to 32%. The number of homes for sale has varied modestly over the past six months and it remains below a healthy level.

The Federal Housing Finance Agency’s Home Price Index increased modestly in May. The rise in prices over the year peaked in February and has steadily decelerated to its lowest level since January 2017. The S&P/Case Shiller Index has reported a stabilization, if not a slight deceleration while Core Logic still has price gains accelerating, though modestly. Putting all these together, it is likely that we are finally seeing a top in the market.

MARKETS AND FED POLICY IMPLICATIONS: Rising costs of construction and mortgage rates, coupled with limited supply, are real problems for the housing market, whether it is the new or existing home segment. The surge in prices over the past couple of years has not been balanced by rising incomes and with rates up as well, affordability is plummeting. With the Fed intent on raising rates and with the strong demand and trade issues driving up construction costs, it is doubtful that this market will be able to pick up any steam anytime soon. And that raises some issues for retailers. Both new and existing home sales drive demand for a variety of housing-related products, such as furniture, kitchen products, paint or garden supplies. A softening in the housing market will slow, with a lag, retail purchases of those types of products. That said, on Friday we get the first reading of second quarter GDP. The consensus is for something in the 4% to 4.5% range - robust growth. Anything with a four-handle will likely calm the nerves of investors, especially given the generally good earnings reports. And much of the momentum built up in the spring should be maintained this summer, though maybe at a more moderate pace. But we need housing to be strong if growth above 3% is to be sustained. While a housing market slowdown should give the Fed some concern, the sector might have to tank before the members would seriously consider slowing the rate normalization process.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.