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Economy houses improvement in new homes and manufacturing

July 26, 2013

Vanguard's Economic Week in Review

Consumers bought new homes at the fastest pace in five years. Sales of previously owned homes dipped slightly on a month-over-month basis, but demand was up sharply from a year ago. The gains in housing and an uptick in long-lasting factory orders are expected to contribute to broader economic growth in the second half of the year.

For the week ended July 26, 2013, the S&P 500 Index was unchanged at 1,692 (for a year-to-date total return—including price change plus dividends—of about 20%). The yield on the 10-year U.S. Treasury note rose 8 basis points for the week to 2.58% (for a year-to-date increase of 80 basis points).

Existing-home sales slip while new-home sales soar

Sales of previously owned homes in June were 15.2% higher than a year ago, an annual rate of 5.08 million units, despite a 1.2% decline from a month earlier. It’s too early to tell whether the recent hike in mortgage interest rates has affected homebuyers as most of the homes sold in June were likely under contract in May, before interest rates began to rise.

According to Freddie Mac (the Federal Home Loan Mortgage Corporation), the national average for a 30-year conventional, fixed rate mortgage rose to 4.07% in June from 3.54% in May, the highest since October 2011, when it was also 4.07%. The rate was 3.68% in June 2012.

Still, Lawrence Yun, chief economist at the National Association of Realtors, said there remains a lot of momentum in the market despite the rise in interest rates. "Affordability conditions remain favorable in most of the country, and we're still dealing with a large pent-up demand," said Mr. Yun.

Federal Reserve Chairman Ben Bernanke assured Congress last week that he would be prepared to intervene if the higher mortgage rates begin to derail the housing recovery.

So far, inventory levels for existing homes remain tight. There was a 5.2-month supply of homes for sale in June, up from 5.0 months in May. The national median existing-home price was $214,200 in June, up 13.5% from a year ago and the sixteenth consecutive month of year-over-year price increases. The higher prices partly reflected tight inventory levels and fewer foreclosure sales.

Existing-home sales

Meanwhile, new homes sales proved even more robust, jumping 8.3% in June to an annual rate of 497,000—the fastest pace since May 2008. Sales exceeded expectations by nearly 3% and were 38% higher than June a year ago. Some of the increase in sales may be attributed to on-the-fence home buyers who wanted to act before mortgage rates rise further.

"As new-home sales increase, sentiment among builders will increase, leading them to hire more workers to build more houses," said Vanguard economist Andrew J. Patterson. "The process of selling a home adds more service jobs and increases GDP as does the process of consumers furnishing their home. This is the type of positive cycle that had been lacking during much of the U.S. economic recovery."

Sales were up in all regions with the exception of the Midwest, which slowed after strong gains in May. The supply of new homes on the market fell to 3.9 months, below a norm of about 6 months. The median sales price of new houses sold last month was $249,700, up 7.4% compared with a year ago; however, new home prices fell 10.3% from a month earlier. Some analysts said the month-over-month decline in prices may reflect builders' attempts to make homes more affordable given the increase in interest rates.

Durable goods orders higher than expected

Orders for durable goods, factory products expected to last three or more years, climbed 4.2% in June, more than three times expectations. The increase was primarily driven by orders for nondefense aircraft, which rose 31.4%. Orders for automobiles and parts and machinery also delivered gains. Excluding transportation, orders for durable goods were flat. Unfilled orders increased 2.1% in June, a sign that perhaps momentum in manufacturing will continue in coming months.

The economic week ahead

Among the key reports to be released next week are the Federal Open Market Committee minutes and second-quarter real gross domestic product figures (Wednesday), as well as the monthly unemployment rate (Friday). Others on tap include the Conference Board’s consumer confidence figures (Tuesday), the Employment Cost Index (Wednesday), construction spending and ISM Manufacturing Index (Thursday), and personal income and factory orders (Friday).

Summary of major economic reports
Date Report Actual
value
Consensus
expected value
10-year note yield S&P 500 Index
July 22 Existing-Home Sales (June, annualized)
Source: National Association of Realtors
+5.08 million +5.25 million 0 bp +0.2%
July 23       +3 bp –0.2%
July 24 New-Home Sales (June, annualized)
Source: Commerce Department
497,000 484,000 +8 bp –0.4%
July 25 Initial Jobless Claims (week ended July 20)
Source: Labor Department
343,000 340,000 0 bp +0.3%
  Durable-Goods Orders (June)
Source: Commerce Department
+4.2% +1.2%
July 26       – 3 bp +0.1%
    Weekly change + 8 bp 0.0%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.

Notes

  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
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