The New-Home Market Leads the Charge

Many commentators were disappointed in the headline number, but they shouldn't have been.

The headline states that housing starts posted at 1.036 million on an annualized rate for May. The consensus was looking for starts to post in the 1.1-million neighborhood. If we compare May with April, we see an 11.1% drop-off in starts.

The numbers appear disappointing, until you dig a little deeper. April, which was already a strong month for starts, was revised up to 1.165 million. That's a 22.1% month-over-month increase when compared to March. Seeing starts throttle back in May after such a strong showing is no reason to sulk. Indeed, it should be expected. To expect continual double-digit monthly increases is to expect the impossible.

The trend in permits is another reason to embrace the future. Permits were up a very stout 11.8% to 1.275 million potential starts. Permits are a leading indicator, and this leading indicator posted its best number since August 2007.

Given the bullish outlook on new-home construction, no one should be surprised that homebuilders are feeling upbeat these days. The NAHB Home Builder Index spiked five points to 59 in June. This is the highest reading since September 2014.

To be sure, sentiment can change and markets can turn. But for the past year, home builders have become increasingly upbeat. Sales and construction activity has generally supported rising optimism. We don't expect that to change over the remainder of 2015.

Of course, the percentage of new-home sales is relatively small compared to existing-home sales. Our bread is mostly buttered on existing-home sales. On that front, sales have trended higher in recent months. Still, they've had a tough time hanging about the important five-million mark on an annualized rate.

The good news is that it appears more likely that sales will hover above five million. A recent report from CoreLogic shows that another 254,000 residential properties regained positive equity in the first quarter. This trend of rising positive equity ensures more supply will come to market, which will lead to a rising sales trend.

What's more, the Federal Reserve appears willing to maintain an accommodating stance.

We've said repeatedly since the beginning of the year that a Fed interest-rate hike was unlikely for June. In the latest Fed meeting, officials showed no inclination to raise the federal funds rates. What's more, it remains unlikely the fed funds rate will be raised before fall. The Fed is still looking for labor-market improvement (mostly wage growth) and more consumer-price inflation. And when the Fed does move to raise the fed fund rates, it will likely do so in very small increments.

That said, let's not take this as a guarantee of low mortgage-lending rates. The market can and has overridden Fed desires. The Fed might not move to raise interest rates; this doesn't mean the market won't.

Information provided by Jessica Regan.

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