The Fed’s rate cut yesterday is in response to slower global growth, uncertainty fueled by the trade war, and a lack of measurable inflation. The move signals that the Fed will do everything in their power to stop the economy from slowing but that ‘power’ is dwindling with just six short-term cuts away from hitting zero.
Consumers, the linchpin of our economy, continue to drive growth. At 70% of the economy, monitoring consumers is critical but many traditional measures like spending and confidence are lagging indicators. Retail sales are a good gauge of consumer health because a slowdown in the sector historically has preceded broader economic slowdowns; the latest read shows a positive clip year-over-year. Housing, another leading indicator, is also showing growth with the homeownership rate increasing to tie with the highest level since 2013 and the pending home sales index matching late-2017 values.
Historically, the Fed cuts rates at one of three times: 1. as an insurance cut to reignite demand and keep growth on track, 2. as an insurance cut gone wrong where the Fed believes it is doing number one but a recession ensues shortly thereafter, or 3. during a recession to give the economy a push. The Fed believes they are cutting in scenario one, but only time will tell how much the cuts will positively influence economic growth.
GDP Shows The Economy Is Split
Consumer and government spending are driving the economy. Business investments continue to slow.
Business owners are trapped in an echo chamber talking about the trade war and recession timing. As such, growth in corporate spending was negative again this quarter as some business owners wait things out.
The latest data for housing still shows the bifurcation between the new and existing home markets. Existing home sales remain down year-to-date compared to last year and the new home market is outperforming every year since 2007. The residential investment portion of GDP went positive this quarter on growth in the new home space and a partial rebound in starts and permits.
The economy is generally considered to be growing at a solid pace when the annual clip is 3.0%. However, understanding the components behind the growth is equally as important. Consumption grew 2.9% in the third quarter showing that the consumer is holding up.
Homeownership Rate Moves In The Right Direction
The national homeownership rate rose to 64.8%, up from earlier this year, but far below the 67.4% average in the year 2000.
People under 35, a key demographic, saw a big bump in the homeownership rate. At 37.5%, the homeownership rate was the highest since 2011. This fits the trends of Millennials today as they are actively looking for homes given their current lifestage. Millennials, however, are still struggling with today’s housing shortage.
Those 35-44 have an extremely low homeownership rate of 60.3% compared to the average in the year 2000 of 68.0%. If this group returned back to the 68.0% homeownership rate, that would create 2 million more households alone. Increased medium-term demand for this group is expected as they fully regain the equity lost during the Great Recession and face their own lifestage changes.
Among the top metros, Los Angeles, New York, and Orlando have the lowest homeownership rate in the third quarter at 48%, 51%, and 53%, respectively. The homeownership rate is also low (54%) for the Bay Area and Las Vegas. Lack of attainable housing supply is the clear culprit behind the below-average homeownership rate for Los Angeles, New York, and the Bay Area. Orlando and Las Vegas are both currently leading the country for the most high-income job growth, but also have a high percentage of workers in the lower-paid leisure and hospitality sectors. Furthermore, the markets are still facing psychological and price-related constraints from the Great Recession; parts of both metros haven’t fully regained pricing power compared to the mid-2000s.
New Home Sales Top 700K For Two Consecutive Months
New home sales are up 7% nationally year-to-date.
Given the well-documented slowdown this time last year, it makes sense to compare September’s values to the same month in 2017. September 2017 represented a healthy housing market this cycle and today’s levels are 9% higher. Adjusting for supply, our data in Zonda shows a 13% increase in the average sales rate per community since September 2017.
Zonda shows that for the latest month, Las Vegas and Phoenix continue to outperform on an average sales rate per community basis, hitting 3.3 and 3.2, respectively. Looking at the growth rate of the average sales rate per community of top markets, Denver, Phoenix, and Washington, DC are posting the highest change year-over-year.
The data from the U.S. Census Bureau comes with a margin of error of +/-20%. When viewed in conjunction with our Zonda data, however, the broader picture gives credence to the directional trend.