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6/17 - 6/21

University of Michigan Survey ​of Consumers

Last Friday, The University of Michigan released their Survey of ​Consumers, showing consumer confidence fell once again. In June, ​the index fell from 69 to 65.6 and it’s down almost 14 points in the last ​three months.

Current conditions fell four points, while the outlook fell 1.2 points. ​One-year inflation expectation were unchanged and the employment ​picture remained weak. Those that expect higher incomes fell to the ​lowest level in 9 years, while spending intentions across the board ​were lower. We will see if this translates to a weaker Retail Sales ​number tomorrow morning.

Retail Sales

Retails Sales for the month of May rose 0.1%, which was beneath estimates of ​0.2%. Additionally, last month’s figure was revised lower from 0% to -0.2%.

Core retail sales, which gets plugged into GDP, rose 0.4%, which was beneath ​estimates of 0.5%. However, the increase would have been lower if not for ​another negative revision – Last month’s figure was revised lower from an already ​weak -0.3% to -0.5%.

For some perspective, retail sales through the first five months of 2024 is only up ​0.3%, showing that consumer spending is slowing. Compare that with the first five ​months of 2019, which was up 4%, and last year, which was up 2.7%.

Today’s weaker figures should result in lower GDP estimates for Q2 and continues ​to show that the consumer is under pressure.

Revisions

We are seeing a lot of negative revisions in the data, showing that the economy and job growth is not as strong as previously reported. The most egregious revisions ​are within the BLS Jobs Data. Here is a quote from our good friend, David Rosenberg, which explains the purpose of the monthly BLS Jobs Data:

“The whole point of nonfarm payrolls is to provide a timely estimate of the QCEW, which is the real and final employment reading and covers 11.9 million establishments ​compared to around 700k entities in the Establishment Survey.”

Here’s the problem – In Q4 2023, the BLS estimated that there were 637,00 job creations. But estimates of the QCEW for the same time period are only showing ​116,000 jobs, meaning that the BLS likely overstated job growth by 521,000…which is material. These are the figures the markets and the Fed go off of and it would have ​told a completely different story. On average, it’s estimated that the BLS overstated jobs by 174,000 each month in Q4 of last year.

Here is what the BLS originally reported vs what the numbers would have been had they not been overstated:

October: 165,000 vs -9,000

November: 182,000 vs 8,333

December: 290,000 vs 116,333

Unfortunately, the markets will not react to revision data from last year, but the truth eventually comes out and it’s looking like the economy is not as strong as once ​believed.

Industrial Production & Capacity ​Utilization

Industrial Production in May rose 0.9%, which was stronger than the 0.3% ​expected. This is one of the cornerstones that the NBER (National Bureau ​of Economic Research) looks at to determine a recession. The beat ​tempered some of the Bond market rally this morning following the weaker ​Retail Sales.

Capacity utilization, or how maxed out capacity is at factories, rose from ​78.2% to 78.7%. This is slightly higher, but a reading below 80% really ​shows factories are underutilized.

Lennar Earnings

Lennar, one of the largest home builders, reported earnings yesterday. They cited the ​same dynamics we have been on why housing has been strong – Housing supply ​remaining chronically short due to production deficits over a decade, and demand is ​strong, driven by household formation.

Their sales rose 19% year over year – They explained that consumers were quite ​responsive to increased sales incentives, which includes price cuts and a lot of ​buydowns.

This is more evidence that there is a lot of demand on the sidelines, but rates are just ​too high. The 19% rise in sales and responsiveness to buydowns shows that when rates ​do come down and cooperate, there will be a lot of activity. Builders have the ability ​to offer buydowns and incentives easily, but so can many sellers. Make sure to coach ​your agents to drive demand and bidding wars.

CoreLogic Rental Index

CoreLogic released their Rental Report for the month of April, showing that blended rents are up 3% year over year, down from 3.4% in the previous report. Truflation, ​which is a comprehensive inflation reading taking in millions of data points, is showing something similar at 2.75%.

Meanwhile in the CPI inflation report, rents are up 5.3% year over year. Clearly this is being overstated because of the way they calculate the data and it’s keeping ​inflation artificially higher, especially because shelter costs make up 45% of Core CPI. But if you were to use the real market rent figures, Core CPI would be lower by ​1%, meaning it would be 2.4% vs the 3.4% being reported.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 5,000 to 238,000, coming slightly off the hottest level in 10 ​months, but remaining at elevated levels. This shows that last week’s number was not an anomaly and the jobs market is indeed weakening, with more firings. ​Additionally, this is the sample week that gets plugged into the BLS Jobs Report and would point to a weaker report for June.

Continuing Claims, which measures Individuals continuing to receive benefits after their initial claims, rose 15,000 to 1.83M. This figure is at the highest level since ​November 2021 and shows that once you are laid off it’s becoming harder to find a new job. This report is another sign that the labor market is beginning to show some ​weakness.

NAHB Housing Market Index

The June NAHB Housing Market Index, which measures builder confidence, fell 2 points to 43, under the 50 level that signals expansion/contraction and at the lowest ​reading in six months.

Persistently high mortgage rates are keeping many prospective buyers on the sidelines. Home builders are also dealing with higher rates for construction and ​development loans, chronic labor shortages and a dearth of buildable lots.

Here is a breakdown of the internal metrics:

Current Sales: fell 3 points to 48 (now in contraction)

Future Expectations: fell 4 points to 47 (now in contraction)

Buyer Traffic: fell 2 points to 28 (contraction, lowest level since December)

The May HMI survey also revealed that 29% of builders cut home prices to bolster sales, up for 25%. This number was 36% in December, however. The use of sales ​incentives ticked up to 61% in June from a reading of 58% in May.

Housing Starts and Permits

Housing Starts fell 5.5% in May to an annualized pace of 1.28M units. Starts are now down 19.3% year over year. Single-Family Starts, which are most important, fell ​5.2% to a 982k unit annualized pace. SF Starts are now down 1.7% year over year.

There were just 295,000 multifamily starts, which is not far from the lowest level since 2017 not including Covid. There is a near record high 914k multi-family units under ​construction, which should add some supply and ease rental pricing pressures.

Building Permits, which is the future supply, fell 3.8% to a 1.39M unit annualized pace and are now down 9.5% year over year. Single-Family Permits fell 2.9% to 949k ​unit annualized pace and are up 3.4% year over year.

Completions fell 8.4% last month to a 1.51M unit annualized pace, while Single-Family fell 8.5% to a 1.03M unit pace. Completions falling and not enough starts or ​permits happening points to continued tight supply for the foreseeable future and with increased household formations, it bodes well for appreciation.

Mortgage Applications

Interest rates fell from 7.02% to 6.94% last week, which sparked some more demand. Rates are now 0.2% higher than they were this time last year.

After a strong increase of 9% in purchase applications two weeks ago, last week they continued to move higher by 2%. Purchases are still down 12% from last year.

Refinance volume was flat, but is now up 30% year over year.

Existing Home Sales

Existing Home Sales, which measures closings on existing homes, fell 0.7% in May to an annualized ​pace of 4.11M units, which was slightly better than expected. Sales are now down 2.8% year over ​year.

This report likely measured people shopping for homes in March and April, when rates were more ​elevated. Considering this, Sales hung in there and fell less than expected.

Inventory increased 6.7% month-over-month to 1.28M units, which is a good thing because there is ​very limited supply, and this could lead to more sales. Inventory is now up 18.5% from the same time ​last year. There is a 3.7-month supply of homes, which is up from 3.5 months, but still very tight ​because 4.6 months is considered normal.

The median home price was $419,300, up 3% from last month and 5.8% from last year. For homes ​priced $1 million or more, inventory increased 34% from last year while sales increased 40% - This is ​largely due to a comeback in CA and is a big reason why the median home price rose so much.

Homes remained on the market for 24 days on average, down from 26 days in April and 33 days in ​March. Even with more inventory, the speed at which homes moved increased, which shows strength. ​We also saw 30% of homes sold above the list price, increasing from 27% in the previous report. ​Almost one in three homes are selling above list price - Make sure to use the bid over ask tool to ​solve this problem for your Realtors and help consumers emotionally get comfortable with it.

First-time homebuyers accounted for 31% of sales, which is down from 33% in the previous report, ​but up from 28% this time last year. Cash buyers accounted for 28% of sales, unchanged from April. ​Investors made up 16%, also unchanged.

Leading Economic Index

The Conference Board released their Leading ​Economic Index, which decreased in May by 0.5%, ​which was worse than estimates of -0.3% and ​follows -0.6% in April. The index has been negative ​25 out of the last 26 months.

The Conference Board said while the index’s six-​month growth rate remained firmly negative, the ​they do not currently forecast a recession. They do ​see things slowing, however, and project real GDP ​growth to fall under 1% over Q2 and Q3 of this ​year, as elevated inflation and high interest rates ​continue to weigh on consumer spending. If we do ​see the economy continue to slow and we see ​recession like conditions, it would likely be helpful ​for inflation and Mortgage Rates.