Home Price Growth Falls & Core Durable Goods Orders Were Strong

Home Price Growth - FHFA Home Price Index

Home price growth is falling sharply which is making this year a great time to buy a house compared to last year when housing was more unaffordable. House prices don’t need to fall to become more affordable; growth just needs to fall. We’ve seen interest rates plummet and now we are seeing the March FHFA home price growth index show the lowest price growth in 4 years. 

With accelerating real wage growth, there’s reason to be optimistic about the housing market. To be clear, in March weekly wage growth was 3.2%, which is below home price growth. However, the decline in mortgage rates tips the scale in the positive direction for affordability.

The situation was much worse last year as real wage growth was lower, inflation was higher, mortgage rates were higher, and home price growth was higher. In 2018, nominal weekly wage growth was 3.26%. In the first 3 months of 2019, average wage growth was also 3.26%, but keep in mind the cumulative effects of the recent wage growth. 

Plus, with the labor market tightening, I expect weekly wage growth to increase in the next few months. If weekly wage growth falls and mortgage rates rise, I will change my thesis on the housing market.

Home Price Growth - Monthly home price growth in March was 0.3% - half that of the previous month. 

Yearly price growth fell from 5.6% to 4.9%. The Case Shiller price growth index will come out next week. The last report showed growth was at a 6.5 year low. It’s amazing to see the turnaround in previously hot areas like Seattle and Denver. 

In the Pacific region, which includes Seattle, monthly home price growth was 0.2% and yearly price growth was 3.7%. In the Mountain region, monthly home price growth was -0.5% and 6.5% yearly. Yearly price growth was 9%, 4 months prior.

In Denver, yearly price growth peaked at 8.5% in March 2018. As of January, price growth was 5%. It’s obvious that price growth got worse in February. I wouldn’t be surprised to see Denver’s housing price growth continue to fall in the next few quarters. 

Some of the hottest areas are coming down to Earth which we always knew would happen. Speculative bubbles always pop. The overall housing market isn’t in a bubble, but some cities were in one last year.

Home Price Growth - Richmond Fed Manufacturing Index Falls

We must keep the regional Fed manufacturing indexes in perspective. They are small samples. As I will get to later in this article, March durable goods orders were strong even though many regional Fed indexes weren’t that great. 

Even though the regional Fed indexes aren’t always in line with the hard data, I like to review the most updated data to see where the economy might be headed.

In March, the Richmond Fed manufacturing index fell from 16 to 10 even though durable goods orders were strong as I mentioned. The latest report from April showed the index fell from 10 to 3. That missed estimates for 11. I’m interested to see if the durable goods report reverses course in April. That would signify the stock market is way too optimistic about future economic growth.

This wasn’t a good report as the volume of new orders index fell from 9 to -2. Outside of the overall index, 4 of the 11 business sector indicators were in the negatives. Backlog of new orders index was the lowest at -12. The good news is only 5 out of 11 fell and 5 increased. 

Further good news is the 6 month expectations for shipments, volume of new orders, and local business conditions rose 9 points to 49, 4 points to 40, and 5 points to 34. Also, the capital expenditures index increased from 24 to 30. At least manufacturing firms in this district are more optimistic about the next 6 months than they were in March.

Home Price Growth - Great Durable Goods Report

The March manufacturing new orders report was amazing. One thing to keep in mind is this report means greatness for Q2 GDP, not Q1 because shipment growth was weak. That’s a good thing since the future is more important than the past. Also, Q1 GDP’s headline reading was great anyway.

Specifically, monthly new order growth was 2.7% which destroyed estimates for 0.7%. This is amazing considering the fact that the February reading was revised higher from -1.6% to -1.1%. Headline growth was pushed higher by the 60% monthly growth in commercial aircraft orders and the 2.1% growth in motor vehicle orders. 

Usually, I expect results to miss estimates on a monthly basis if the previous month’s data was revised higher. This reading beat the highest estimate which was 1.9%. Ex-transportation monthly growth was 0.4% which doubled expectations. That wasn’t as impressive because the previous month’s growth rate was revised from 0.1% to -0.2%.

I think this was a great report because core capital goods order growth was 1.3% monthly and 5.3% yearly. Estimates for monthly growth were just 0.1%. The prior reading went from -0.1% to 0.1%. Yearly growth increased from 2.8% and the 2 year stack increased as well. 

Shipment growth wasn’t great; this hurt Q1 GDP growth. Specifically, core capital goods shipments fell 0.2% monthly and overall shipments were up 0.3%. Unfilled orders for core capital goods were up 0.2% which ended a negative streak. Overall, inventories were up 0.3% which was the 2nd increase in a row. Q1 GDP report was boosted by inventories. The inventory to shipments ratio was a lean 1.62.

Home Price Growth - Conclusion

Home price growth fell which means homes got more affordable in March as interest rates cratered. The April Richmond Fed manufacturing report signaled the strong durable goods orders report was an aberration. 

However, I put much more faith in the hard data durable goods report than I do one regional Fed manufacturing index. Strong core order growth signals the economy will be fine in Q2. Attachments area

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