Economic Update: First Quarter 2016 Yielded Mixed Messages

Despite job growth, mid-April estimates for first quarter GDP is suggesting a rate as low

as 0.1 percent

By Patrick S. Duffy

If there’s one thing I’ve noticed lately in the MetroIntelligence Economic Update, it’s that there have been some mixed messages from the various indices we regularly track. This is because while job growth remains pretty steady, some mid-April estimates for first quarter GDP growth are suggesting rates as low as 0.1 percent. This is because many U.S. companies are still struggling against global economic developments and turbulence in the stock market. So what’s going on, and what does that mean for the housing market?

Looking first at jobs, non-farm employment rose again by 215,000 in March, while unemployment remained mostly unchanged at 5.0 percent. In addition, job growth has averaged 209,000 per month during the first quarter of 2016 versus 190,000 during the same period of 2015 (and due mostly to a steep decline to just 84,000 new jobs in March of 2015). So while GDP output may be sputtering, job growth remains strong.

Confidence—both among builders and consumers—has also remained steady, with the NAHB’s Housing Market Index hovering around the 60-point range (and where anything above 50 is positive) since last June. However, builders do continue to report shortages of both lots and labor as the gauge measuring expectations over the next six months fell by three points to 61. Depending on its source, consumer confidence has also remained mostly unchanged over the last nine months, generally hovering around the low to mid 90s, although one recent survey reports consumers feeling more optimistic about future income than at any time since 2007.

Home affordability—as measured by the Wells Fargo Housing Opportunity Index—won’t be updated for the first quarter of this year until mid-May, but during the fourth quarter of 2015 it rose slightly to 63.3 percent, due both to a lower median sales price of $226,000 and a lesser-weighted interest rate of 4.09 percent. This level compares to the last trough of 40.4 set in the third quarter of 2006 and the last high of 77.5 from the first quarter of 2012.

As noted in previous columns, inflation remains very low by historical standards which, along with the uncertainty in global markets, is why the Federal Reserve is being so conservative about its next Federal Funds interest rate hike. Although the Consumer Price Index rose by just 0.9 percent for the 12-month period ending with March 2016, it rose by 2.2 percent when subtracting out the volatile food and energy sectors, resulting in its second-largest increase since May of 2012. This is also why wage growth—a key contributor to positive consumer sentiment—has been recently rising regionally for jobs in information technology, skilled construction, and manufacturing. In turn, higher wages will prompt more demand from consumers, especially if they’re in need of larger homes, but that will take some time.

For now, consumers are keeping some of those extra wages, with consumer expenditures rising by just 0.1 percent in January after an increase of 3.4 percent for all of 2015. Retail sales also fell unexpectedly in March after remaining flat in February, mostly due to fewer sales of new cars.

On the housing front, single-family new home sales are continuing to dance around the 500,000-per-year level, totaling 512,000 in February 2016; this is up from two percent from January’s total, but down about six percent from the same month of 2015. At February’s sales rates, existing inventory would take 5.6 months to sell versus 4.5 months a year earlier. Nonetheless, as of April 1st, the NAHB is still forecasting 596,000 single-family home sales for 2016 against 838,000 single-family and 390,000 multi-family housing starts.

In the existing home market, the culprit is lack of supply. February sales tumbled 7.1 percent from January to 5.08 million per year due to a combination of fewer affordable homes for sale and continued price growth in several regions of the country. As proof of this, the median home price in February rose 4.4 percent over the past year to $210,800, thus marking the 48th straight month of year-over-year gains. At February’s sales levels, existing inventory would take 4.4 months to sell, up from 4.0 months in January.

Still, one bright spot for the existing home market in February was pending sales, with the NAR’s index rising 3.5 percent from January as well as 0.7 percent above the same month of 2015. However, their chief economist still notes that momentum won’t continue unless there’s a steady stream of new listings to replace what’s being sold to a growing pool of buyers.

Patrick S. Duffy is a Principal with MetroIntelligence Real Estate Advisors, authors The Housing Chronicles Blog, and contributes to BuilderBytes. He may be reached at
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