Heading into the home stretch of 2015, the U.S. is on track to have its best year since the Great Recession began. After concluding the third round of Quantitative Easing in October of last year, the economic recovery had to continue on its own initiative this year and so far, it has. Consider:
- The nation’s jobless rate is at its lowest level since April 2008. Healthy job growth has led to stronger demand for housing.
- New home sales are at their highest levels since August 2008 while existing home sales reached their highest levels since February 2007 earlier in the year.
- On the supply side, single-family building permit activity is currently at its highest levels since January 2008 and overall permit activity has come in above a 1 million unit seasonally adjusted annual rate for 24 consecutive months.
- Stocks hit record-highs this year and oil fell to a multi-year low.
Going forward, here are some key factors that will affect the direction of the economy and housing in the final months of the year.
The Impending Fed Rate Hike
Weaker global economic growth has recently caused labor market conditions to soften in the U.S. The economy had the weakest two-month stretch of job creation in August-September 2015 since December 2013-January 2014. While many expected the Fed to raise rates at some point before the end of the year, chances of a Fed rate hike have greatly diminished as of late. With inflation relatively tame, the Fed has leeway to continue their accommodative stance in order to make sure the recovery doesn’t get derailed.
Demand for U.S. Debt Will Impact Mortgage Rates
Slower growth in China coupled with financial turmoil in the EU earlier this year proved that the U.S. is still the safest place in the world to invest. Even though the Chinese government recently sold over $150 billion in U.S. bonds to support the yuan and their national economy, rates still remained historically low. Institutions and foreign investors are still buying up U.S. debt because it remains the safest investment in times of uncertainty. Falling asset prices internationally will also attract foreign capital to relatively safe U.S. assets like real estate.
Weather Could Cause Disruption
As we have already seen with Hurricane Joaquin in the Carolina’s, these last few months of the year can bring weather events that will have implications on the housing market. Extreme weather from hurricane season will mean less homebuyer traffic and homebuilding activity in the South and up the East Coast. However, the damage as a result of these storms will lead to rebuilding and renovations later down the road, similar as what occurred after Hurricane Sandy hit the Jersey Shore several years ago. Meteorologists are predicting potentially record-breaking rainfalls from El Niño this year which could have the same impact on housing for the West Coast. While California is in desperate need of rainfall due to the drought, huge rainfall could result in mudslides and less homebuyer activity.
A Strong Dollar and Falling Commodity Prices
Weakness overseas has resulted in a stronger dollar that is affecting trade and manufacturing activity. A stronger dollar makes imports less expensive and exports more expensive. The manufacturing sector shed 9,000 payrolls in September and has been weak since the dollar started strengthening. Also, while lower crude prices have put more money back in consumers’ pockets, it is also causing job cuts in the energy sector. If healthy job growth is to continue, trade and manufacturing activity along with energy prices need to stabilize.
Housing demand based on job growth has declined noticeably since the spring. The E/P ratio (which takes the number of jobs created over the past year divided by the number of building permits issued over that same period) has been steadily declining. This is a result of slower job growth and elevated levels of residential building activity. The economy has been supported by Quantitative Easing and essentially a zero-rate policy since the downturn began in 2008. Last year, the Fed removed QE, with the result that the economy, the housing market and the stock market proceeded with their recovery just fine. Eventually, the Fed will raise rates and we will see if the effect will be the same.
Kevin Gillen, Ph.D., Chief Economist
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