Global Daily – US housing not cold not hot

by: Maritza Cabezas

Global-Daily-Insight-25-September-2014.pdf ()
  • US housing market mixed in August, after strong data in July
  • German’s Ifo declines more than expected…
  • …while Mr Draghi reaffirms that monetary policy will remain accommodative for as long as it takes

US housing data mixed in August

The housing market has been moving in the right direction this year, but the pace of recovery has been slow. August’s new set of housing data released in the past days, suggest a mixed picture, but follows a number of strong upward revisions of data in the previous month. Home builder confidence in September remains strong, reaching an eight month high. This should give further impulse to housing starts which declined 14.4% after a sharp upward revision of 22.9% the previous month. Meanwhile, building permits declined 5.6% from an upward revised 8.6% the previous month. As for the demand for housing, existing home sales cooled down in August, declining 1.8% from 2.2% the previous month. The August disappointment, taken together with slight downward back revisions, left the level of existing home sales at 5.05mn. Some of the demand for existing homes has come from investors snapping distressed property  and it appears that these type of transactions have been gradually declining. As for new home sales these increased 18% from 1.9% the previous month. The stock of existing homes (5.5 months) has been steady and that of new homes (4.8 months) has been slightly declining in the past few months, which is a positive sign. July’s FHFA house price index increased to 0.1% mom down from 0.3%.


In sum, the weaker data this month is partly payback for the strong upward revisions of the previous month. Indeed, US housing market is known for its volatility. Nonetheless, the housing market recovery has been much slower than expected. The fact that home buying can be delayed without any implications has avoided to trigger homeownership despite the improvement in the labour market. A strong rebound has yet to occur, given that many living at home are still employed. We think that the improving labour market should lift household incomes, resulting in a rebound in housing demand. In fact in cities where relative home affordability has combined with a favourable job market, housing demand has been fuelled.

Germany’s Ifo disappoints

Germany’s Ifo business climate index dropped to 104.7 in September from 106.3 in August. This was weaker than consensus at 105.8. Current conditions moderated further from 111.1 to 110.5 but continued to indicate an expansion of industrial production in September. Business expectations however, fell below 100 to only 99.3. The expectations index is part of the survey that moves closes in line with economic growth. At this current level, the Ifo index is dampening expectations of a strong rebound. This report, however, contrasts with the composite PMI for Germany released a day before, which indicated a slight improvement and remained consistent with a modest pace of expansion. Indeed, the flash composite PMI edged up to 54 up from 53.7. The EUR/USD slipped further after the release of the data. Meanwhile in a radio interview yesterday, Mr Draghi signaled that the euro’s depreciation reflects the divergent paths of monetary policy from other important countries. Indeed, President Draghi affirmed that monetary policy will remain accommodative through time, while other countries’ policy may gradually acknowledge that recovery is taking place in their countries. Overnight the EUR/USD closed below 1.28, the lowest level since July last year. We expect prices to head lower towards 1.20 by the end of 2015.