Forecast Update: Retail Sales, NAHB/Wells Fargo Market Index, Mortgage Applications, Jobless Claims, and More

A weekly analysis of the economic data released during the past week, and how current economic conditions are affecting the real estate market.

The interest rate on the 30-year fixed mortgage rate has increased from approximately 4.5 percent in early November to 5.15 percent as of February 10th. The increase in the treasury rate has been precipitated in part by stronger economic growth prospects as well as an increase in inflation expectations. The market is currently pricing annual inflation over the next ten years to be approximately 2.31 percent. This represents a 21 bps increase since early November.

Higher inflation expectations and growth prospects will put upward pressure on long term interest rates, including mortgage rates. However, greater consumer demand, and improved employment should buttress housing demand and offset some of the effects of increased borrowing costs.

Retail Sales, Consumer Demand

The Census Bureau announced this morning that retail sales rose 0.3 percent in January. Sales at building materials and garden centers fell 2.9 percent relative to December. This portion of the report tends to be volatile and the decline might partially be explained by recent weather patterns. It is up 8.7 percent relative to January of 2011 and rose in 5 of the prior 6 months, suggesting that construction and renovation projects are on the rise.

Retails sales were down from the 0.6 percent pace in December. This pattern is typical of the post-holiday slump in consumer demand, but retails sales remain 7.8 percent higher than January of 2010.

Also released today was the National Association of Home Builders/Wells Fargo Housing Market Index. This index, which measures builders’ confidence and is an early indicator of tomorrow’s construction report, was flat at 16 in February, the 4th consecutive month at this level. The index for current conditions edged up 2 points to 17, while the expectations component rose 1 point to 25. The survey indicates that tight lending along with an abundance of foreclosures and appraisal issues are creating problems for the industry.

Construction was an important source of both income and job growth during most of the recent economic expansions. Though sluggish, construction growth will help to boost GDP and confidence in 2011, but job growth from construction remains anemic. Consumer demand is taking a post-holiday breather, but it remains strong. Other indicators of employment have perked up lately and this trend is likely to help consumer confidence and spending through the spring.

Mortgage Purchase Applications, Housing Starts, Inflation
Mortgage purchase applications continued their recent weakness, falling 5.9 percent for the week ending February 11th. Purchase applications are a leading indicator of home sales. However, purchase applications do not always translate into loan acceptances and transactions. Also, purchase applications do not take into consideration cash buyers who according to the November REALTORS® Confidence Index make up as much as 29 percent of transactions. In Las Vegas and Miami, the cash purchases have said to approach 50 percent.

Mortgage purchase applications were down 17.5 percent from the same week a year ago.

Higher down payments may be contributing to the weakness in mortgage applications. According to a Wall Street Journal article, the median down payment in nine cities rose to 22 percent in 2010, double what it was three years prior. Refinances, which made up 64 percent of mortgage activity, fell 11.4 percent as mortgage rates continued to trend higher at 5.12 percent on a 30-year fixed mortgage.

Housing starts were up 14.6 percent in January, after a 5.1 percent decline in December. Home starts came in at an annualized 596,000, above forecasts and the 520,000 annualized starts the month prior.

The news was not all good, as the gains were mainly due to a 77.7 percent surge in multifamily starts, compared with a 1.0 percent decline in single-family starts. Also, housing permits were down 10.4 percent in January.

Inflation continues to be a worry as the producer price index (PPI) rose 0.8 percent in January from the previous month. Energy prices continued to rise and push the index higher. Core inflation, which excludes food and energy components, rose considerably at 0.5 percent. Pharmaceuticals helped lead the core PPI higher.

Jobless Claims, Consumer Price Index
The new jobless claims weekly report continues showing large swings in data. After a steep decline the week before, last week’s report shows a steep increase of 25,000 to 410,000. The four-week average also rose 1,750 to 417,750 which basically yields no improvement between mid-January and mid-February jobless claims. Remaining below 400,000 would indicate sustainable growth in the job market.

Continuing claims have been inching down slightly though the last report showed an uptick of 1,000 to 3.911 million. The four-week average of 3.942 million is down 73,000 from the month before. There had been 984,000 net new job additions in the past 12 months to January. Assuming that jobless claims continue to trend down, NAR expects about 1.5 to 2 million net new jobs in the next 12 months.

The Consumer Price Index (CPI), measuring inflation, continued on an upward trend largely due to strong gains in energy costs and food price. The CPI in January increased 0.4 percent, following a 0.4 percent increase in December. The housing component index rose 0.1 percent in January, with the rent index increasing 0.2 percent and the index for owners’ equivalent rent rising 0.1 percent.

The rising trends in rent will begin to make some renters to think about the affordability of ownership. Over the last year, overall CPI inflation increased to 1.7 (seasonally adjusted) from 1.4 percent in December.

Industrial Production
Industrial production, which came out earlier this week, declined by 0.1 percent in January, but is 5.2 percent higher than January a year ago, a sign of continued recovery. Capacity Utilization is a measure of the share of productive resources that are employed in production. It is an indicator of slack or the lack thereof in the economy. When capacity utilization is low, there is slack in the economy and inflation is less likely to take hold. Capacity Utilization for the whole economy is 76.1, lower than last month’s 76.2 and below the longer term 80.5 average. So at least from this measure, there does not appear to a sustained building of inflationary pressure. But other measures suggest impending inflationary pressure. For more on inflation, check out NAR’s Inflation Watch on the economic indicators page.

©National Association of Realtors – reprinted w/permission