Housing and manufacturing should be two sectors pulling the economy forward. In today’s climate, they’re hindering its progress, and unlikely to change much
Alarm bells aren’t sounding, but warnings continue to come from the housing and manufacturing sectors that when it comes to the US economy, things aren’t all right.
New single-family home sales were revised down for March, April, and May, and although they shot up in June, it’s not being seen as a strong enough sign that the housing market is in good shape—especially given other factors such as incredibly low rates and unemployment levels.
The Commerce Department said new-home sales rebounded 7.0% to a seasonally adjusted annual rate of 646,000 units in June. May’s sales pace was revised down to 604,000 units from the previously reported 626,000 units.
Data for March and April was also revised down. Forecasts for home sales, which account for about 11% of housing market sales, were to increase 6% to a pace of 660,000 units in June. New home sales are drawn from permits and tend to be volatile on a month-to-month basis. Sales increased 4.5% from a year ago.
Another sign of weakness comes from the manufacturing sector. Activity there slowed to a near 10-year low in early July, in both production volumes and purchases.
These two weak spots—housing and manufacturing—are the Achilles heels of the economy, offsetting strong consumer spending habits and preventing the economy from running full speed ahead.
“There is no evidence here to change the narrative that the response of the housing market to lower mortgage rates has been underwhelming,” John Ryding, chief economist at RDQ Economics in New York, told Reuters. “The best description of home sales is that they have leveled out in the neighborhood of 620,000.”
Given their current state, the effects and outcomes from the interest-rate cut predicted for next week are unclear. The 30-year fixed mortgage rate has dropped to an average of 3.81% from a more than seven-year peak of 4.94% in November, according to data from mortgage finance agency Freddie Mac.
Demand remains quite high due to those drops and low unemployment, and it’s possible that a lower interest rate will actually foster greater competition and raise home prices even higher, making it more difficult for people to buy homes.
The median new house price was unchanged at $310,400 in June from a year ago, but recent data indicates that homebuyers aren’t comfortable with that price. In fact, half of today’s home shoppers want to purchase a property for under $288,000, according to a study from Realtor.com, which analyzed their home-search data. That’s 9.1%, or $27,000, below the median price of all homes currently on the market, which is $315,000.
“The price differences between what buyers are searching for, closing on, and what's available on the market demonstrates just how big the gap is for entry-level home buyers,” said Danielle Hale, chief economist for Realtor.com. “Buying a first home has always been a challenge, but with such a slim number of entry-level homes available, it's especially difficult now.”
Realtor.com estimated that roughly 94,000 homes priced between $100,000 and $340,000 would need to be put up for sale to achieve equilibrium between what buyers want and the inventory that’s available, and that would represent a 15% increase in the number of listings in this price range. Currently, inventory is growing the most for homes priced above $750,000.
“Entry-level homes continue to be difficult to come by as the inventory composition shifts more and more toward higher priced homes. This is causing smaller and more affordable homes to appreciate rapidly, resulting in a mismatch between what buyers are able to spend and what sellers expect to receive,” Hale wrote in the report.
Building costs, lack of labor, and zoning constraints mean that builders are building homes that have a higher profit margin, rather than entry-level homes that are more affordable to buyers. Looking at a more regional snapshot, new home sales in the South, which account for the bulk of transactions, rose 0.3% in June to a 13-month high. Sales in the Midwest dropped 26.3% to their lowest level since September 2015. Sales in the West rebounded 50.4%, the biggest gain since August 2010, more than recouping May’s 38.5% plunge. In the Northeast, sales dropped for the second straight month, hitting their lowest level in eight months.
June’s uninspiring housing data left economists anticipating that residential investment contracted again in the second quarter, contributing to an expected slowdown in economic growth last quarter. The lower-than-expected earnings from Caterpillar and Boeing underscore the issues in the manufacturing sector. In the latest report from data firm IHS Markit, its Flash U.S. manufacturing PMI slipped to a reading of 50 in July, the lowest since September 2009, from 50.6 in June.
The reading is in line with the neutral 50 threshold, which IHS Markit said signaled stagnant manufacturing business conditions. Manufacturing, which accounts for about 12% of the U.S. economy, is being led by a glut of inventory, particularly in the automobile sector.
