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Market Minute - June 1, 2018

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Housing/Real Estate Market
N.A.R.® Pending Sales Index Declines 2.1% Year-Over-Year in April: NATIONAL ASSOCIATION OF RELATORS® released its pending sales index for April 2018, down 1.3% after two months of previous gains. No region saw gains in contracts, while the western index lost .4% from last month and is down 4.6% below last year.

Home Prices Show Little Signs of Slowing:
The Case-Shiller Index shows that home prices rose by 6.5% in March, continuing robust growth from increasing demand and limited supply. Seattle (13.0%), Vegas (12.4%) and San Francisco (11.3%) had the highest year-over-year growth, but both the 10-city and 20-city indices rose by similar proportions to the overall series. The downside to this growth is that affordability will continue to deteriorate as prices consistently outpace growth in take-home pay.

Construction Spending Rises Strongly in April:
Census Bureau reports that construction spending in April 2018 increased 7.6% at an annualized rate of $1.31 billion. Month over month growth increased by 1.8% from revisited March estimates as well. Overall, growth was driven by strong private residential single-family construction (+9.6% year-over-year, 4.5% month-over-month). New multi-family was up from last month (+3.6%), but down from last year (-4.0%).

Macro Economy

Q1-2018 Revised GDP Remains Strong, Non-Residential Investment Up: The Bureau of Economic Analysis reported its revised in its Q1-2018 numbers that the U.S. economy expanded at a 2.2% pace during the first quarter. While non-residential fixed investment was revised upwards, private inventory, residential, and exports were all revised down. Also reported, California’s state GDP increased by 5.0% annualized in 2017, helping to drive the state’s unemployment rate down to 4.2%, although labor force participation and dropout issues persist.

223,000 Jobs added in U.S. Employment Report:
BLS reports that the U.S. added 223,000 jobs in May as the unemployment rate dipped to 3.8%. Two-thirds of the decrease in unemployment was due to rising employed population, with the other one third accounted by dropping labor force participation. Other optimistic signs: workers not in the labor force in April were 2.7 times more likely to get a job in May after re-entering the labor market than in previous months, and 1.9 times more likely to remain looking. Year-over-year growth in jobs was a positive 2.36 million. The report was stronger than expected, with upward revisions for both February and March.

National Unemployment Claims Down Slightly to 221,000.
Department of Labor reports initial claims at 221,000 jobs dropping 13,000 from last week’s unrevised figure. The four-week moving average of 222,250 is up slightly from last week. Low levels of claims indicate few layoffs and a strong labor and economic market.

Personal Income and Spending Beat Expectations:
BEA data shows that personal income increased by 0.3% in April and disposable income increased by .4%. This translated into a 0.6% uptick in personal consumption expenditures last month meaning that consumers spent, rather than saved, that additional income. Real personal consumption expenditures increased by 0.4%, and 2.0%, year-over-year respectively; while core inflation - PCE minus food and energy (the Fed’s preferred gauge) has not turned up as feared. Core PCE was at 1.803% from last year, down slightly from March’s 1.83% below the Fed’s 2% target.

Dallas Fed Reports 12 Year High in Manufacturing Activity.
The Texas Manufacturing Outlook Survey of southern executives showed a 10 point increase in its index to 35.2 points; a huge jump. All indices: new orders, capacity utilization, and shipping rose to record highs. High global oil prices could be spurring manufacturing orders in anticipation of shale gas related mini-boom as local hydro-carbon production moves back into profitability.

Similarly, the St. Louis Fed’s Beige Book of economic activity summary reported moderate national economic expansion in April and May.
The Dallas District (as above) was an exception with especially strong activity, while industrial activity across the country was reported as "strong."

The Chicago Fed’s National Activity Index (CFNAI) confirmed reports of continuing economic growth.
Reporting in its index, a small pickup in overall economic growth in April. The index rose to +0.34 in April from +0.32 in March. Three factors: manufacturing, orders, and production were positive forces on the index, while personal consumption and housing were slight drags.

ISM Survey Also Shows Expanding Manufacturing Sector:
The ISM’s manufacturing index, which measures activity in manufacturing output rose to 58.7 in May—up from 57.4 in April (anything over 50 signals expansion). The manufacturing survey also remained in expansion territory for the second month, though it dipped from March. Orders, employment, production, and supplier deliveries all increased from April, while inventories dipped down. Prices also were reported higher as tariffs and generally higher raw materials reverberated through the supply chain. Rising oil prices and a weakening U.S. dollar could be helping to bolster this beleaguered sector.

Real Estate Finance

Revenues from Mortgage Interest Deductions Decline by 38% in 2018,
and will be reduced by 50% in 2019; homeownership unchanged. The Joint Center on Taxes released estimates of changes to tax revenues resulting from this year’s tax reform bill. However, the Joint Center revised down its estimates of the revenues that the federal government would forgo: last year it forecast that by 2020 $83.4 billion in MID revenue would be foregone; now, it believes that number will only be $36.9 billion. What changed: a higher than expected increase in the use of the larger standard deduction, pushing many homeowners to not itemize deductions; as well as caps on the amount of MID and state and local deductions. The JCT also found that the tax changes have not negatively affected the general homeownership rate, nor has it managed to slow down home price growth.

Freddie Mac Interest Rates Eased Slightly After Highs:
Mortgage rates fell 10 basis points last week to 4.56% from 4.66% the previous week, the 5-year ARM also dropped to 3.8% from 3.87% with 0.3 points down. Rates remain near their highest levels since 2013, and weekly mortgage applications this week slowed down 2.9% according to Mortgage Bankers Association. The MBA Refinance Index also dropped 5% from last week to its lowest level since 2000. Market watchers have worried about rate volatility stemming from political issues in Europe, but these have yet to affect rates.

Past Market Minutes  

May 25, 2018 - New homes, manufacturing, Dodd Frank repeal
May 18, 2018 - Listings, unemployment, mortgage credit scores

May 11, 2018 - Inflation, consumer credit, loan delinquencies
May 4, 2018 - Pending sales, personal expenditures, mortgage applications
April 27, 2018 - Homeownership rates, GDP, mortgage rates

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