First Quarter Economic Update

Despite a minor hangover from 2018, there is no recession in sight for the housing market

By PATRICK DUFFY

If you were to plan for the rest of 2019 based on some media headlines alone, you might be preparing for a recession later this year or in 2020. However, given that a recession is defined as two or more consecutive quarters of negative GDP growth, these headlines are mostly conjecture.

What we saw in the first quarter of 2019 was an economy mostly downgrading from the fiscal stimulus in 2018 following the Tax Cuts and Jobs Act of 2017, and one that is still expected to continue growing – albeit at a slower pace – at least for the rest of the year.

Throughout 2018, the U.S. economy grew by 2.9 percent, which was the best showing since 2015. However, most of the stimulus from the tax cuts was realized by the third quarter of that year, with GDP growth slipping from 3.4 to 2.2 percent by the fourth quarter. As of early April, Federal Reserve banks in New York and Atlanta were estimating that GDP growth in the first quarter of 2019 was ranging from 1.3 to 2.1 percent.

The job market remains robust, with both the unemployment rate of 3.8 percent and initial applications for unemployment insurance remaining near 50-year lows. Job growth in March rose sharply by 196,000 from February’s dip, resulting in an average of 180,000 jobs per month for the first quarter. Although this growth rate was down 19 percent from the same period of 2018, it is still more than twice the rate required to absorb population growth.

While planned job cuts for the first quarter were indeed up nearly 36 percent year-on-year, that is largely due to structural retrenching in retail, industrial goods,
and the auto industry, with limited cuts in construction. Moreover, as of January, the job openings rate was 4.8 percent, with more than one million positions remaining unfilled nationwide.

Consumer sentiment bounced back sharply in March to a level slightly above the average posted over the past 26 months, but that gain was all noted for households with incomes in the bottom two-thirds of income distribution, while sentiment dipped slightly for those in the top third. Those working in private, non- farm jobs are enjoying annual wage increases of nearly 3.2 percent per year, significantly higher than the overall inflation rate of closer to 2.0 percent. This bodes well for both homebuyers in search of that first home, as well as new households opting for their first rental unit together.

While it is true that consumer spending rose less than expected in January, improving consumer sentiment and higher credit use in February is likely to translate into better days for retailers as spring turns to summer.

With the stock market dipping sharply in the last weeks of 2018 and indications that the economy was slowing, the Federal Reserve punted indefinitely on more interest rate hikes in 2019, which, along with slower global growth, has helped conforming mortgage interest rates to drop to their lowest levels in over a year.

Inflation, at least according to the ‘core’ PCE Price Index, fell to 1.8 percent per year
in March, which also lent support to the Fed’s decision in March to hold rates at their current levels through as long as 2021. The Fed also revised their economic projections at this meeting, forecasting 2019 to end with GDP growth of 2.1 percent, an unemployment rate of 3.7 percent, and inflation at 2.0 percent.

For the housing market itself, signs of life are starting to emerge after an economic cold winter, with existing home sales rebounding 11.2 percent in March, the largest monthly gain since December 2015. At the same time, the median sales price rose 3.6 percent year- on-year to $249,500, and the unsold inventory timeline slipped to 3.5 months, down from 3.9 months in January.

For just new homes, sales of single-family units rose by nearly five percent in February to the highest annual rate in nearly a year, while the inventory timeline dipped to 6.1 months, or the lowest rate since last June. Still, builders are remaining understandably conservative with new supply, as February’s year-on-year housing starts dipped over 10 percent, and building permits slipped two percent.

In the long run, however, given that a 2018 report from the Up for Growth National Coalition calculated that the U.S. under-produced 7.3 million units of housing from 2000 to 2015, even a minor recession – when it occurs – is not likely to profoundly dent this pent-up demand from growing American households.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He may be reached at pduffy@metrointel.com or 310-666-8288.

Leave a Reply