Second Quarter Economic Update: Slower Growth and Trade Headwinds Not Denting Buyer Demand

If you’ve been keeping up on economic news lately, both the global and U.S. domestic economies are in an odd place. Not too long ago, a combination of lower job gains, declining business confidence and stalling wage growth was suggesting the end was near for one of the longest expansions in American history. Higher interest rates were forcing some home sellers to adjust expectations so buyers could still afford the purchase.

As it turned out, however, some of those metrics were simply a temporary blip, with job creation roaring back in June, stock market indices continuing to hit record levels, and mortgage rates retreating to levels not seen since the fall of 2017.  Still, as the global economy has shifted away from manufacturing towards more services, so have the risks related to trade agreements, a reliance on low interest rates, and more activist politics attempting to address sluggish growth in living standards.

For now, growth is chugging along at a positive but smaller level than a year ago, and central banks around the world are doing a decent job of coordinating their interest rates so that dollar-denominated payments for debt and trade flows are minimally impacted, thus providing some stability. But the ongoing skirmish in trade is creating chaos for global supply chains, depressing business investment and increasing the chances of economic shocks.

For home builders, pent-up demand from new households remains strong, while the supply side continues to face challenges including higher construction costs, labor shortages and fewer buildable lots, thus putting pricing pressure on both for-sale and rental housing.

Certainly the job market remains strong, with the unemployment rate remaining at or below 4.0 percent since March of 2018, and the labor participation rate for civilian workers age 25 to 54 staying at over 82 percent. But average job growth for the second quarter of 2019 was down nearly 30 percent compared with the same quarter of 2018, and planned job cuts, although down 26 percent from the first quarter of 2019, were up 34 percent between the two year-on-year time periods. 

Moreover, the labor participation rate for all workers – including teenagers trying to get that first job or older workers facing ageism – has remained stubbornly stuck under 64 percent since the beginning of 2012. Nonetheless, wages grew by 3.7 percent in the second quarter versus the same period of 2018, or nearly double the 1.8 percent gain in the Consumer Price Index.

Two issues now particularly vexing to economists are the relatively low levels of inflation and interest rates at the same time, especially at a time when the U.S. national debt is growing at a rate over $1 trillion per year.  The Fed-preferred PCE Price Index grew at just 1.5 percent per year through May, or well below the 2.0 percent long-term level it would prefer to maintain so that both firms and households have confidence in the institution’s ability to maintain price stability.

As of mid-July, given that the Federal Reserve banks in New York and Atlanta were estimating GDP growth in the second quarter of 2019 at 1.4 to 1.6 percent (and which was 2.1 percent in the first official estimate a week later) versus the first quarter’s strong showing of 3.1 percent, by lowering its Federal Funds rate for the first time since late 2008, the central bank is hoping to extend the economic expansion as long as possible. 

For the housing market itself, buyers are re-emerging following declines in mortgage rates, but they’re still facing low inventory and rising prices.  Existing home sales rebounded in May after two months of declines, but were still down 1.1 percent year-on-year even as sales prices rose 4.8 percent to $277,700.  Unsold inventory has risen from the lows of earlier in the year, but the 4.3-month supply continues to favor sellers over buyers.

The best answer to these supply constraints remains newly constructed homes.  Year-to-date sales of new single-family homes through May of 2019 were up 3.7 percent year-on-year versus 2018, and the pricing differential between existing and new construction has fallen to just under 10 percent, down from nearly 40 percent just a few years ago.

That’s in large part to large, public builders tapping their economics of scale to focus on the emerging millennial buyer increasingly driving the entry-level market.  Given their decade-long delay entering the housing market, millennials are expected to continue increasing their home buying demand even as their Generation Z counterparts begin to join them.  That, in turn, should provide some cushion to the industry even with some economic questions remaining unanswered on the global stage.