Disappointing housing data may be giving some investors pause, but Gluskin Sheff Chief Economist David Rosenberg continues to look on the bright side. He emphasized today that the housing data is reported on a lag and that overall, the first quarter is shaping up to be a much better one for the U.S. economy than the fourth quarter was. So it looks like recovery continues… even if the Fed isn’t willing to go out on a limb and say it’s leaning toward hiking rates in June.
No worries about soft housing data
In January, existing home sales in the U.S. soared to their second highest level in eight years, notes Rosenberg, but then in February, the metric skidded 7.1% month over month to hit 5.08 million units on an annual rate. It also came up quite short of the consensus at an annualized sales pace of 5.31 million units.
David Rosenberg believes the East Coast blizzard played a key role in that decline, noting that home sales in the Northeast tumbled 17.1% from January to February. However, he adds that all four areas did see declines, which means that the blizzard wasn’t entirely to blame. He highlights three main factors he believes all weighed on February home sales, which are affordability, supply, and a change in taste.
For example, he said the supply of properties for sale is down 1.1%, which means builders have become too cautious. He calls this “a classic case of mean-reversion from the free-wheeling ‘build it and they will come’ mentality in the last bull cycle.” He added that first-time buyers are cringing away from the $210,800 median home price as only 30% of home sales came from this group compared to 40% in what he called “a more normal market.”
Rosenberg also noted that the 3.7% 30-year fixed mortgage rate isn’t a big problem for most potential home buyers, but credit for residential loans remains tight as the bank-wide lending pace is only a little higher than 3% on an annualized basis. Also this part of banks’ balance sheets is the slowest area for expansion of assets, he said.
The economist reminds us that existing home sales are reported on a three-month lag because they are counted when the sales close, which means the sales that closed in February were actually agreed to three months before. In other words, don’t write off existing home sales for this year yet.
He continues to like where the U.S. economy is right now and where it’s heading. He said Macroeconomic Advisers has set its gross domestic product measure at 2% higher than where it was in the fourth quarter on an annual rate. David Rosenberg also notes that this includes only January, which showed an annualized increase of 5.2% and that between November and January, this measure has climbed at the fastest rate of growth since June 2015.
He noted other strong data points as well, like the Atlanta Fed GDPNow’s estimate at a 1.9% annual rate gain, adding that growth is heading upward rather than downward at the margin and that markets change in the same direction as the margin.
The U.S. is also finally starting to see improvements in inflation, as he said the Atlanta Fed Wage Growth Tracker grew from a 2.9% year over year increase in October to 3.1% in January and 3.2% last month. Further, he sees the probability of deflation occurring declining from 10% last month to 6% right now.
“Measures of economic and equity market uncertainty have been halved since the February lows in equities, helping to explain the renewed expansion in the price-to-earnings multiple,” he explained in today’s “Breakfast with Dave” note. “Money velocity and the money multiplier have bottomed out – both M2 and MZM are running at +6% YoY growth rates and bank credit is rising at over an 8% pace (10% on a 13-week rate of change basis.”