First Quarter 2014 in Review: A Spring Thaw is Coming

Given that the first quarter of 2014 gave us some decidedly mixed messages on economic output and housing demand, it was certainly good news to see that The Conference Board’s Leading Economic Index, or LEI, rose by a definitive 0.8 percent in March on the heels of smaller increases in both February and January.

What this likely means is that after a weather-related pause due to a particularly harsh winter in much of the country, economic growth is again gaining traction.  Still, the economy has yet to function on all cylinders, with both the labor market and consumer confidence improving while building permits – certainly a future-looking barometer – dipped by 2.4 percent in March and have bounced mostly between 900,000 and one million units per month over the last year. Meanwhile, housing starts rose by nearly three percent in March and averaged 923,000 units during the first quarter of 2014, but are still down by about six percent from March 2013.

For now, builders are still managing to sell close to 450,000 annualized single-family units per year while inventory has been slowly creeping up to 189,000 homes by February 2014, or about 5.2 months of supply.  At the same time, the median sales price for new homes hit $261,800 in February versus $267,700 for all of 2013.

After being in a holding pattern for several months, builder confidence ended the quarter at 46 before rising by one point to 47 in April.  According to NAHB Economist David Crowe, “Headwinds that are holding up a more robust recovery include ongoing tight credit conditions for home buyers and fact that builders in many markets are facing a limited availability of lots and labor.”

For existing homes, the mixed messages are also in abundance, with total sales remaining mostly flat in March at 4.59 million on an annual basis but down by 7.5 percent from a year earlier.  Still, prices continued to rise by nearly 8 percent to $198,500 over the last 12 months.  Certainly, one key benefit of rising home prices is increased equity, thus removing even more homeowners from the negative equity column while contributing to fewer distressed sales.   Such distressed sales accounted for just 14 percent of March’s total sales, down from 21 percent a year earlier and likely to fall into the single digits later this year.

Existing home inventory at the end of March rose by nearly five percent to about two million homes or about 5.2 months of supply – the same timeline reported for new home inventory in February and a slight increase from the previous month.  However, the median time it took to sell an existing home fell to 55 days in March 2014, or about a week less than reported a year earlier.

On the labor front, the 192,000 jobs added in March meant that the country had finally reached a major milestone:  recapturing all of the jobs lost in The Great Recession.   Yet because the unemployment rate remained stubbornly stuck at 6.7 percent, in its most recent meeting the Federal Reserve’s Open Market Committee decided to keep its short-term interest rates at historic lows even if the unemployment rate falls below 6.5 percent, its previous threshold.  In addition, the monthly survey of planned job cuts by Challenger, Gray and Christmas showed that employers announced the lowest level of first-quarter job cuts in 19 years.

This gradual improvement in the economy has the Fed on track to continue reducing its purchase of mortgage-backed bonds by $10 billion per month.  This third round of ‘quantitative easing’ was meant to lend support to a housing market and keep the flow of mortgage credit from collapsing.

Consumers are also waking up from their own economic nap, which is critical for an economy in which consumer spending accounts for nearly 70 percent of gross national product.  During March, retail sales jumped at the highest rate since September 2012 after following a February advance that was twice originally estimated.  Even better, despite the harsh winter and a severe drought across the Western U.S., consumer’s views of their financial prospects were much higher in March than three months earlier.

However, one warning is in order:  because consumers have become so accustomed to low interest rates, any increase in borrowing costs is expected to have a much higher impact on buying behavior than in years past when current interest rates were higher.   Rather than jumping on a good deal, they may simply wait to see if the purchase is in their best interest.