Posted by David Matzko
Wednesday, November 29, 2023
- Consumers are contending with a confounding housing market. New home prices are down over 17% from a year ago but existing home prices continue to increase. This may provide some opportunities for homebuilders to meet demand.
- As prices for durable goods fall, consumers retained an appetite for purchasing major items, but the pace of spending will likely slow in the coming months.
- Economic data often gets revised downward as an economy downshifts, as we saw in the latest Conference Board report and the revised consumer spending estimates from Q3.
- The recent economic data are suppressing yields and stimulating the appetite for risk assets.
Homebuilders Look for Opportunities
One of the confounding experiences for consumers these days is within the housing market. Prospective buyers are reading the tale of two markets when it comes to residential real estate. After a volatile 2022, the pace of new home sales has stabilized around the pre-pandemic rate. This is good news for homebuilders prepping for 2024, especially for companies such as PulteGroup (PHM) with a diversified portfolio. Median prices for new homes are down roughly 17% from last year as inflation pressures moderate. With supply of existing homes still below 50% of its pre-pandemic level, homebuilders stand ready to take advantage of any increase in demand. Currently, activity is strongest in the Midwest and West, with supply chain issues and inclement weather negatively affecting builds in the Northeast. Both permit issuances and new housing starts saw recent increases and beat their respective forecasts.
Amid low inventory of existing homes on the market, new home sales will likely remain stable to meet the demand. As mortgage rates fall and the Federal Reserve (Fed) pivots away from hiking rates, homebuilders might expect continued growth in business activity.
An Appetite Not Yet Satiated
Confidence in November rose from last month, but only because of October’s significant downward revision. As prices for durable goods fall, consumers retained an appetite for purchasing major items such as automobiles, big appliances, and homes. Although, more respondents reported jobs were becoming harder to find, meaning a slowdown in spending is likely as the year wraps up.
Investors should remember that economic data often gets revised downward as the economy downshifts, as we saw in the Conference Board report. The three-month average for consumer confidence fell for the third consecutive month, reaching the lowest since August 2022. As we saw in the holiday sales figures, the consumer is still spending but much depends on the job market. All eyes should be on the upcoming jobs report on December 8. As the labor market cools, investors should expect consumer spending to slow down, but so far, it looks like a soft landing. All in, the data supports the Fed’s likely decision to keep rates unchanged at next month’s meeting.
Another Mixed Bag
This morning’s revised estimate for Q3 GDP was full of surprises. Revisions pushed headline growth to 5.2% annualized from 4.9%, but investors must look beneath the headlines.
Consumer spending was revised down to 3.6% annualized from 4.0% but government spending was revised up. Consumer data is often revised downward as the economy downshifts and we see this again in the latest GDP report. Looking ahead, we should expect inventories to subtract from Q4 growth and possibly see less support from consumer spending.
In addition to weaker consumer spending, markets are digesting Fed governor Christopher Waller’s apparent pivot, as he commented yesterday that the Fed could hold rates steady at the upcoming meeting. Investors know that Waller had been the most hawkish of Fed officials, so this is market-moving. Treasury yields and the U.S. dollar fell on the news.
The Bottom Line
The Fed could find themselves in a sweet spot. Inflation is trending lower, the consumer is still spending but at a slower pace, and the Fed could end its rate-hiking campaign without much pain inflicted on the economy. Looking ahead, markets will hotly anticipate the upcoming Beige Book release for anecdotal evidence on the state of the economy, but so far, the economic data are suppressing yields and stimulating the appetite for risk assets.
One additional item to watch is the U.S. dollar. As the Fed started to sound less hawkish, investors saw a decline in the dollar. A weaker dollar is often good for emerging markets, potentially providing an opportunity in the near future. LPL Research currently holds a negative view of emerging market equities but acknowledges valuations are attractive and that certain markets such as India and Brazil are intriguing.
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