Housing Data Perks Up--But Will It Last?

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Last week saw some soft data. I'm here today with Bob Johnson, our director of economic analysis, to look at this week's data to see if there is any firming in the economy.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: Let's start with the housing market--something that I know you've been hoping would be a driver this year. What data did we see come out of the housing sector?

Johnson: Last week, we had the starts and permits data, which looked a little bit soft. The permits looked OK, but that was because New York had a special credit and everybody was racing to the beat that. But those numbers were indeed disappointing.

This week, to offset that, we've had some better data. First of all, on the home-sale front, we had new-home sales, which mainly includes the single-family category. It doesn't include all of the apartment-building stuff in the data, so it's a little bit narrower base. But we saw the fifth month in row where we've been above 500,000 units sold. We went through all of 2014 without a single month over 500,000 sales. Now, we've had five of them in a row.

And I like this one now. I never used to be a fan of new-home sales, but now I've become a bigger fan because it includes homes that are on the drawing board that haven't been started yet. So, it's probably the most forward looking of all the housing metrics. And so I was really pleased with the number we saw on that report where new-home sales were up at a recovery high.

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Glaser: How about existing-home sales?

Johnson: Yes, existing is another category that didn't do very well last year. We saw a great month again in May. We had 535,000 units, which is very close to the July high. So, again, a very good number, very near a recovery high, clearly better than it's been. We've had a few months of disappointments there. Obviously, whether it's new or existing, they all help move furniture sales, they all help move brokerage commissions, they all help move mortgage transactions, which are all things that are helpful to the economy. So, we're very glad to see that doing a little better as well.

Glaser: If sales are looking better, what does that mean for prices?

Johnson: We saw some of the FHFA data, which kind of confirms what we saw in CoreLogic, which is over 5% growth, year over year, in prices. But it looks like maybe we're leveling off just a little bit. We had kind of a spurt where we were just around 4%-ish to over 5% for a lot of the housing-price metrics. Now, we've kind of flattened out a little bit, which I think is good news. We're in kind of "Goldilocks" land, where it's high enough that it's getting people who are underwater up a little bit but not so high as to completely ruin affordability. So, the pricing data that we got out of FHFA was good news this week. We still are kind of watching this. We're a little bit fearful that new starts and so forth haven't done wonderfully and if the market is kind of tight that it will keep prices going up a little bit. But we'll be watching that one really close in the months ahead.

Glaser: How about the sustainability of these numbers, then? Are you worried about higher prices or higher interest rates short-circuiting the recovery?

Johnson: At the moment, my main fear is that the numbers hadn't been so good, and some of the metrics, even this year, haven't looked so great on housing; now, all of a sudden, we've had this pop out of nowhere. I'm a little bit fearful that it's kind of like we saw in 2013, where we had a nice pop when the 10-year Treasury started to go up, because that moves mortgage rates up--they are very tightly linked. They are up a fair amount now, and so people are rushing to beat the rates. At the same time, it's seasonally a pretty strong time of year. And those have combined to probably inflate the numbers just a little bit. I'd guess that if rates are moving up, we might have a couple of months of that rush to beat, if you will. Typically, if we have one [rate increase], we have two or three. And so it's good news for the next two or three months; unfortunately, we saw what happened in 2014 after [the good numbers we had in] 2013. So, it's not such great news for the back half of the year.

Glaser: Let's turn our attention to manufacturing. Durable goods--a metric that has not looked so great for, really, the entire year--what did we see there? Are there signs of manufacturing looking better?

Johnson: At least we've got one better number, which is something good that I haven't been able to say for a while. If you strip out transportation orders, which is mainly the aircraft, which bounce all over the place and it affects manufacturing out in 2021-22 because of the huge backlog we have on airplanes. So, that's why we strip those out.

But when you look at the current durable-goods orders--ex-transportation--we finally had an up month. It's only up 0.3%, but we've had seven straight months of downs in that category. To finally have an up month, with the strength relatively broad-based, we were really glad to see that.

And when we look at capital goods--ex-defense and ex-aircraft--that number was also up. Now, it hadn't been quite as bleak--we were only down five of the last six months. So, that hadn't been quite as bleak, but that number moved up again in the month of May. That indicates a little bit more business confidence and more business spending. Business shipments also looked a little better, which may help the second quarter along as well.

Glaser: What are your expectations, then, for manufacturing for the remainder the year? Do you expect to kind of be bouncing around the bottom here or could there be a bit of an upswing?

Johnson: Well, I'm expecting a little bit of a bounce along the bottom, I'm afraid. I'm hoping we've stopped the decline, which is good enough. That's all I really had in my economic forecast. I wasn't expecting ruin, and I wasn't expecting a boom. [I was expecting] a strong slowing from the almost 5% growth that we had in 2014 to something that looked more like 2.5% in 2015--which is pretty close to the long-term average. I think all of the data I've seen so far is pretty supportive of that.

I wouldn't expect a boom. I think we've still got an issue in exports. I think we've still got an issue in energy-related things that are going to hold us back. And I've always said I hope the housing will bring this up because you need the lumber and you need the furniture and all the stuff that goes into it. Again, all of that stuff comes just a little bit later, so I'm afraid it won't come soon enough to really save the numbers in 2015, which will probably be, like I said, below average. But I'm glad to see that we're at least moving in the right direction.

Glaser: Looking a little bit more globally, are there signs that the eurozone's or China's manufacturers are doing any better? What did that data show?

Johnson: The data there showed that Europe had its third month in a row of improvement. It's actually approaching the number for the Purchasing Managers' Index. They are relatively close to the U.S. now at 52.5, so that was good to see. It's not exactly booming yet, but at least it's improving. So, the quantitative-easing program over there seems to have at least helped a little bit. That's good news.

China, which had been down for many months in a row, also kind of ticked back up. Unfortunately, it's still below that 50 level, which separates growth from contraction. So, it's still in that contraction mode, but at least we've closed the gap a little bit. It's not as bad as it was. I think people were pleased with that; we've had a little bit of a rally in some of the emerging markets this week, as China seems to be acting a little bit better.

Glaser: Overall, does the data this week, so far, give you some comfort as to the state of the economy after the previous week's data?

Johnson: Yeah, I think this certainly indicates that we aren't in any type of freefall. Certainly, some of the numbers last week looked surprisingly bleak, and I think it was good to see these numbers look better. Like I said, there are a few things at work here that are helping the numbers: the QE programs, the housing situation with the higher rates and manufacturing having been down so many months in a row, and the U.S. dollar finally being back down a little bit. All of those things have probably helped some of the data along a little bit, but I'm still pleased to see it. It certainly indicates to me that we're on target to have overall 2% to 2.5% GDP growth for the full year of 2015.

Glaser: Bob, thanks as always for your take.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.