Fewer Americans Sign Contracts to Buy Homes in September

Pending Home SalesWASHINGTON — September marked a slowdown in Americans signing contracts to buy homes, the second consecutive decline for a real estate market that has been rebounding for the first half of 2015.

The National Association of Realtors said Thursday that its seasonally adjusted pending home sales index dropped 2.3 percent to 106.8 last month. The index has risen 3 percent over the past 12 months, aided by solid hiring levels and low mortgage rates that fueled stronger demand during the traditional summer buying season.

But evidence of fading momentum has surfaced in recent months. Sales of newly built homes fell 11.5 percent last month, as choppy financial markets and rising home prices are creating affordability pressures for would-be buyers. The strong demand for housing due to stronger job market — with unemployment at a robust 5.1 percent — has failed to produce an influx of new listings that could help sales.

Pending sales are a barometer of future purchases. A lag of a month or two usually exists between a contract and a completed sale. Signed contracts fell in the Northeast, Midwest and South last month, while slipping slightly in the West.

Over the past 12 months, sales of existing homes have risen 8.8 percent over the past 12 months. But the inventory on the market has dropped 3.1 percent, the Realtors said last week.

A mere 4.8 months’ supply of homes is available for would-be buyers, substantially below the 6 months associated with a healthy market.

The tight inventories have pushed up home values. The median home sales price was $221,900 in September, a 6.1 percent annual increase.

But historically low borrowing costs have offset the impact of rising prices.

The average fixed-rate, 30-year mortgage this week was 3.76 percent, down from 3.98 percent a year ago, according to the mortgage firm Freddie Mac.

Inventories Hurt 3Q GDP, Domestic Demand Strong

General MotorsWASHINGTON — U.S. economic growth braked sharply in the third quarter as businesses cut back on restocking warehouses to work off an inventory glut, but solid domestic demand could encourage the Federal Reserve to raise interest rates in December.

Gross domestic product increased at a 1.5 percent annual rate after expanding at a 3.9 percent clip in the second quarter, the Commerce Department said Thursday.

The inventory drag, however, is likely to be temporary and economists expect growth to pick up in the fourth quarter given strong domestic fundamentals.

“The guts of the report were healthy, they still show strong underlying momentum in the economy and that puts a December rate hike firmly on the table.

“The guts of the report were healthy, they still show strong underlying momentum in the economy and that puts a December rate hike firmly on the table,” said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York.

The Fed on Wednesday described the economy as growing at a “moderate” pace and hinted at a December rate increase by making a direct reference to its next policy meeting. The U.S. central bank has kept benchmark overnight interest rates near zero since December 2008.

Stocks on Wall Street and prices for U.S. Treasury debt fell on the data. The dollar weakened against a basket of currencies.

The economy has struggled to sustain a faster pace of growth since the end of the 2007-09 recession, with average yearly growth failing to break above 2.5 percent. This year, it has faced headwinds from a strong dollar and deep spending cuts by energy firms following a collapse in oil prices.

Businesses accumulated $56.8 billion worth of inventory in the third quarter, the smallest since the first quarter of 2014 and down sharply from $113.5 billion in the April-June period. There were declines in manufacturing, wholesale and retail inventories.

The small inventory build sliced off 1.44 percentage points from third-quarter GDP growth, the largest since the fourth quarter of 2012.

“That inventory drawdown represents a bit of a healthy purge that should set the economy up for stronger growth in the coming quarters,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors in Kalamazoo, Michigan.

Consumer Save the Day

The blow from inventories was, however, blunted by bullish consumers, who are getting a tailwind from cheaper gasoline and firming housing and labor markets.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 3.2 percent rate after expanding at a 3.6 percent pace in the second quarter. A measure of private domestic demand, which excludes trade, inventories and government spending, rose at a sturdy 3.2 percent pace.

Spending is likely to remain supported by a fairly healthy labor market and low inflation, which is boosting household purchasing power. Income at the disposal of households increased 3.5 percent in the third quarter after rising 1.2 percent in the prior quarter.

“The consumer remains the main engine of economic growth. We expect this dynamic to remain in place,” said Jesse Hurwitz, an economist at Barclays in New York.

A separate report from the Labor Departmentshowed new applications for unemployment benefits last week hovering near levels last seen in late 1973.

With the dollar strengthening, export growth decelerated in the third quarter. The drag was, however, offset by a slowdown in imports, especially automobiles, leaving trade’s impact on growth neutral.

Ongoing spending cuts in the energy sector also undermined growth. A plunge in oil prices has prompted oil field companies like Schlumberger (SLM) and Halliburton (HAL) to slash investment.

Schlumberger said this month it didn’t expect a recovery in demand before 2017 and anticipated that exploration and production spending would fall again in 2016.

Spending on mining exploration, wells and shafts tumbled at a 46.9 percent rate after dropping at a 68 percent pace in the second quarter. Investment in nonresidential structures contracted at a 4 percent pace, also weighed down by weak spending on commercial and healthcare structures.

Despite strong domestic demand, dollar strength and cheaper gasoline dampened inflation.

The personal consumption expenditures price index rose at a 1.2 percent rate after rising 2.2 percent in the second quarter. Excluding food and energy, prices increased at a 1.3 percent pace, slowing from a 1.9 percent rate in the second quarter.

Manufacturing Weakness Persists; Worst May Be Over

Ford Explorer
WASHINGTON — U.S. manufacturing activity in October hit a 2½-year low, but a rise in new orders offered hope for a sector buffeted by a strong dollar and relentless spending cuts by energy companies.

Other data released Monday showed construction spending rose in September, indicating the economy remained on firmer ground despite signs of consumer spending cooling.

Given that manufacturing accounts for only 12 percent of the economy, analysts said it was unlikely to influence the U.S. Federal Reserve’s decision whether to raise interest rates this year.

We do not expect the manufacturing data will cause the Fed to push the first rate hike back into 2016.

“We are marginally encouraged by a pickup in the new orders, but export orders continue to contract. We do not expect the manufacturing data will cause the Fed to push the first rate hike back into 2016,” said John Ryding, chief economist at RDQ Economics in New York.

The Institute for Supply Management said its national manufacturing index slipped to 50.1 this month, the lowest level since May 2013, from a reading of 50.2 in September. The index is barely hanging above the 50 mark, the dividing line between expansion and contraction.

Manufacturers continued to cite the dollar’s strength and low oil prices as headwinds. The new orders sub-index rose to 52.9 last month from 50.1 in September, but export orders continued to contract. There were modest improvements in supplier deliveries and backlog orders.

In addition, there was a decrease in the share of customers who believed inventories were too high, and the stock of unsold goods at factories also fell. Efforts by businesses to reduce an inventory overhang have weighed on factory activity.

The employment index contracted in October for the first time in six months, hitting its lowest level since August 2009, suggesting more weakness in factory payrolls.

“Overall, we view the ISM report as consistent with our view that the manufacturing sector is moving past the worst of the slump reported early on this year, but that conditions will likely remain soft as we see continued negative effects from the stronger dollar,” said Daniel Silver, an economist at JPMorgan in New York.

That upbeat assessment was evident in a separate report from data firm Markit showing a pickup in factory activity last month.

U.S. stocks rose on the data, while prices of U.S. government debt fell. The dollar slipped against a basket of currencies after two members of the European Central Bank’s governing council made remarks that lowered expectations the ECB would increase its bond-purchase program next month.

Dollar Bites

Seven manufacturing industries, including furniture and fabricated metal products, reported growth in October. Nine industries, including apparel, primary metals, petroleum and coal products, electrical equipment, appliances and components, machinery and transportation equipment, reported contraction.

The dollar has gained 16.8 percent against the currencies of the United States’ main trading partners since June 2014, squeezing the profits of multinational companies like Procter & Gamble (PG) and 3M (MMM).

At the same time, a plunge in oil prices has pressured revenues for oil field companies like Schlumberger (SLM) and diversified manufacturer Caterpillar (CAT).

In a separate report, the Commerce Department said construction spending advanced 0.6 percent to its highest level since March 2008, after increasing 0.7 percent in August.

Construction spending has increased every month this year.

Data last week suggested consumer spending lost momentum at the end of the third quarter, with consumption in September posting its smallest increase in eight months.

In September, construction spending was boosted by a 0.6 percent rise in private construction spending, which hit its highest level since January 2008.

Spending on private residential construction jumped 1.9 percent in September, also reaching the highest level since January 2008, reflecting gains in home building and renovations.

“These numbers bode well for residential investment in the fourth quarter,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York.

“We expect that gradually firming wage growth, continued employment gains, and very solid consumer confidence will strengthen housing demand and lead to stronger housing activity in the coming months.”

Investment on private non-residential construction projects, however, fell 0.7 percent. Public construction outlays gained 0.7 percent, with spending on state and local government projects increasing 0.9 percent. Federal government outlays declined 1 percent.

Factory Orders Fall for 2nd Straight Month in September

Factory OrdersWASHINGTON — New orders for U.S. factory goods fell for a second straight month in September as the manufacturing sector continues to struggle under the weight of a strong dollar and deep spending cuts by energy companies.

Motor vehicle production, however, remains a bright spot as orders surged in September. That trend is likely to persist as automakers reported Tuesday that sales in October were the best in 14 years.

“This morning’s report provides little new signal on the state of U.S. manufacturing. Demand for many categories of manufactured goods continues to struggle from the effect of a stronger dollar, weak foreign demand and lower energy prices,” said Jesse Hurwitz, an economist at Barclays in New York.

The Commerce Department said new orders for manufactured goods declined 1 percent after a downwardly revised 2.1 percent drop in August. Factory orders were previously reported to have declined 1.7 percent in August.

Orders for automobiles and parts rose 1.5 percent in September after falling 2 percent in August.

Auto sales jumped 13.6 percent in October from a year ago to an annual rate of 18.24 million units, the highest October level since 2001, according to Autodata Corp. Sales rose to a 18.17 million-unit rate in September.

October’s increase suggested that consumer spending remained robust after two straight quarters of strong increases and bolsters expectations of a December interest rate hike from the Federal Reserve.

The dollar firmed against a basket of currencies and stocks on Wall Street rose. U.S. government debt prices fell.

Factory activity, which accounts for about 12 percent of the economy, is also being constrained by efforts by businesses to reduce an inventory overhang and tepid global demand. But the worst could be over for the sector after a report Monday showed new orders rose in October for the first time since July.

The dollar has gained 16.8 percent against the currencies of the United States’ main trading partners since June 2014, which has undercut export growth and weighed on the profits of multinational corporations such as Procter & Gamble (PG) and 3M (MMM).

At the same time, a plunge in oil prices has pressured revenues for oil field companies such as Schlumberger (SLM) and diversified manufacturer Caterpillar (CAT).

Inventories Being Liquidated

The factory orders report also showed a 0.4 percent drop in manufacturing inventories, which was bigger than the government had assumed for its advance third-quarter gross domestic product estimate published last week.

Economists said the factory inventory drop suggested the third-quarter GDP estimate could be lowered by at least one-tenth of a percentage point to a 1.4 percent annual pace when the government publishes its first revision later this month.

A slow pace of inventory accumulation accounted for the bulk of the sharp step-down in growth from the second quarter’s brisk 3.9 percent rate.

Still, the September drop in factory inventories is an encouraging sign for the sector as it suggests orders will rise in the months ahead. The inventories-to-shipments ratio was unchanged at a still lofty 1.35 in September.

“A steady pace of liquidation will eventually boost output as orders move closer to sales and input utilization levels,” said Kevin Cummins, senior economist at RBS in Stamford, Connecticut.

Manufacturers reported Monday a decrease in the share of customers who believed inventories were too high, and a fall in the stock of unsold goods at factories in October.

The Commerce Department also reported that September orders for non-defense capital goods excluding aircraft — seen as a measure of business confidence and spending plans — slipped 0.1 percent instead of the 0.3 percent drop initially reported last month.

This also supports the view that the worst of the manufacturing slump might be over. Shipments of these so-called core capital goods, which are used to calculate business equipment spending in the GDP report, increased 0.5 percent in September as reported last month.

Economic Data Seen Supporting December Interest Rate Hike

Trade Gap
WASHINGTON — U.S. private employers maintained a steady pace of hiring in October and a jump in new orders buoyed activity in the services sector, suggesting the economy was strong enough to support an interest rate hike from the Federal Reserve in December.

The economic outlook was further brightened by another report Wednesday showing the trade deficit hit a seven-month low in September as exports rebounded, a tentative sign the worst of the drag from the stronger dollar may be over.

You have a set of data thus far that tells the Fed that things are in good shape going into the fourth quarter and is giving them the green light to go.

Fed Chair Janet Yellen told lawmakers Wednesday the U.S. economy is “performing well” and aDecember rate hike could be justified.

“You have a set of data thus far that tells the Fed that things are in good shape going into the fourth quarter and is giving them the green light to go,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

The ADP National Employment Report showed private payrolls increased 182,000 last month on top of the 190,000 jobs added in September. Job gains last month were broad-based, though manufacturing lost 2,000 positions.

The ADP report, which is jointly developed with Moody’s Analytics, was released ahead of Friday’s more comprehensive employment report from the Labor Department.

According to a Reuters survey of economists, nonfarm payrolls increased 180,000 in October, well above the average gain of 139,000 jobs for August and September.

Economists say the expected October job gains would be seen as sufficient for the Fed to raise its benchmark overnight interest rate from near zero at its Dec. 15-16 policy meeting. The unemployment rate is forecast to be steady at 5.1 percent.

In a separate report, the Institute for Supply Management said its non-manufacturing index rose to 59.1 last month from a reading of 56.9 in September. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of the U.S. economy.

A gauge of new orders received by services industries rose a sturdy 5.3 percentage points to 62 and employment increased to 59.2 percent from a reading of 58.3 in September. Fourteen services industries reported growth last month. Only mining reported a contraction.

“It suggests that the service sector has hardly skipped a beat despite signs of weakness in other parts of the economy,” said Millan Mulraine, deputy chief economist at TD Securities in New York. “The U.S. economic recovery is off to a very strong start in the fourth quarter after the subpar performance in the third quarter.”

The economy expanded at a 1.5 percent annual rate in the July-September period, hurt by a slow pace of inventory accumulation and ongoing spending cuts by energy firms.

The dollar rose Wednesday against a basket of currencies, getting an additional boost from Yellen’s comments. U.S. stocks and prices for Treasury debt fell.

Improving Fortunes

The economy’s improving fortunes also were underscored by a report Tuesdayshowing auto sales hit a seasonally adjusted annualized rate of 18.2 million vehicles in October, the best performance for that month since 2001.

That was reinforced by a third report on Wednesday from the Commerce Department showing the trade gap fell 15 percent to $40.8 billion in September, the smallest deficit since February. Lower crude oil prices also helped to curb the import bill.

The dollar has gained 16.8 percent against the currencies of the United States’ main trading partners since June 2014, undercutting export growth. Lackluster global demand also has put a damper on exports.

Exports in September rose 1.6 percent to $187.9 billion, with exports of services hitting a record high. There were increases in exports of capital goods and automobiles. Exports of industrial supplies and materials, however, were the lowest since October 2010.

Imports fell 1.8 percent to $228.7 billion, the lowest level since February. They had received a boost in August from Apple’s new iPhone model. Imports of industrial supplies and materials fell to near a six-year low.

Petroleum imports were the lowest since May 2004, reflecting increased domestic energy production and lower oil prices. Petroleum prices averaged $42.72 a barrel in September, down from $49.33 in August and $92.52 in September 2014.

Imports from China hit a record high in September, leaving the politically sensitive U.S.-China trade deficit at an all-time high of $36.3 billion. That was up 3.8 percent from August.

Fed’s Yellen Sees Possible December Rate Hike

Janet Yellen Testifies Before House Financial Services Committee
WASHINGTON — Federal Reserve Chair Janet Yellen pointed Wednesday to a possible December interest rate “liftoff” but said rates would rise only slowly from then on to nurture the U.S. economic recovery.

In her first public comments since the Fed’s meeting last week Yellen laid out what now appears the base case at the U.S. central bank — that low unemployment, continued growth and faith in a coming return of inflation means the country is ready for higher interest rates.

Her remarks pushed bond yields higher and stocks lower. They also caused investors to reset their expectations of a December rate hike above 60 percent, a sign that markets are finally taking the Fed’s language seriously after a period in which U.S. central bankers were frustrated by the gap between their own outlook and market bets about their likely course of action.

If the incoming information supports that expectation then our statement indicates that December would be a live possibility.

“What the committee has been expecting is that the economy will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2 percent target over the medium term,” Yellen said at a House Financial Services Committee hearing.

“If the incoming information supports that expectation then our statement indicates that December would be a live possibility.”

William Dudley, the influential president of the New York Fed and a permanent voter on policy, said later on Wednesday that he would “completely agree” with Yellen. December “is a live possibility, but we’ll see what the data shows,” he told reporters in New York.

Yellen, Dudley and the other 15 Fed policymakers now have six weeks to analyze new data, debate and decide whether at their Dec. 15-16 meeting to end the ultra-low interest rates set in response to the 2007-2009 economic crisis and recession.

Moving sooner rather than later to begin tightening policy, Yellen said, would allow the Fed to take a gradual approach to further hikes, slow enough to ensure that housing and other key markets are not disrupted by rising rates.

“Moving in a timely fashion — if the data and the outlook justify such a move — is a prudent thing to do because we will be able to move in a more gradual and measured pace,” she said.

‘Very Gradual Path’

“It’s been a long time that interest rates have been at zero, but markets and the public should be thinking about the entire path of policy rates over time. And the committee’s expectation is that that will be a very gradual path.”

As the central bank approaches the critical decision, there has been division at the highest levels over whether the time is right. Fed governor Lael Brainard has expressed among the deepest concerns about whether a weak global economy could damage the U.S. recovery, but on Wednesday struck a slightly more upbeat note.

“The improvement in the labor market has been extremely steady,” Brainard said at a conference in Germany. “There are certain aspects of the U.S. outlook that are encouraging.”

Both Brainard and Yellen emphasized that the Fed has not yet made a decision, and that incoming economic data would have to meet the central bank’s expectations of how the economy is performing.

Another top Fed official, Vice Chairman Stanley Fischer, is scheduled to speak at a forum in Washington later on Wednesday.

“At the moment what we see is a domestic economy that is pretty strong and growing at a solid pace, offset by some weakening spilling over to us from the global economy,” Yellen said. “On balance, as we said, we still see the risks to economic growth and the labor market as balanced.”

First-Time Homebuyers Often Wait to Buy House After Marriage

Couple relaxing with coffee by boxes in new home smilingThe number of people purchasing their first home, especially millennials, could be impacted negatively by shifting demographics as the median age for marriage is rising.

A recent survey by NeighborWorks America, the Washington, D.C.-based affordable housing organization, found that 43 percent the respondents said they intended to buy a home when they “got married or moved in with a life partner.” The median age for a first marriage has risen to 29.3 years old for men and 27 years old for women, according to the U.S. Census Bureau. In 2000, men first got married at 26.8 years old while the median age for women was 25.1 years old.

Other respondents said they would wait to buy a home when other changes occurred, with 22 percent who will purchase one when they have children and 18 percent who are still seeking their first full-time job.

Many millennials are delaying the purchase of a home because not only are they waiting until they are older to get married, a large percentage are also saddled with a large amount of student loans. The survey also demonstrated that 57 percent respondents admitted that student loans were either “very much” or “somewhat” of an obstacle, a rising concern compared to 49 percent who expressed this sentiment in 2014.

“Homeownership rates are likely being impacted by declining marriage rates as life events that impact the composition of the household are drivers of housing demand,” said Jonathan Smoke, chief economist of Realtor.com, the San Jose, California-based real estate service company. “Student debt, limited savings and housing affordability are substantial obstacles facing millennials as they consider the path to homeownership, and those issues are all connected.”

Another compelling factor is that with two incomes, couples are more likely to qualify for a mortgage and have enough savings for a downpayment.

“Having more singles means fewer households are in a financial position to buy,” he said. “So with fewer young married households, there would be less demand for owning.”

Older Millennials Buying Homes

Some older millennials, or those who are 25 to 34 years old, are buying homes in “large numbers this year,” due to a stronger job market, Smoke said. The number of first-time buyers of current homes increased to 32 percent in August compared to 28 percent in July, according to the National Association of Realtors, the Chicago-based trade group. Half of all home sales for the first six months of the year can be attributed to people buying a home for the first time, he said. Millennials make up 68 percent of all first-time homebuyers, according to the trade group.

“They are the single biggest age group for homebuyers, so there are clearly substantial numbers of them who are able to overcome these obstacles,” Smoke said.

Rising Debt Delaying Home Purchases

Student debt is a large factor in whether millennials can qualify for a mortgage, depending on their income, said Smoke. The burden increases substantially for people who attended college and took out loans to fund their education, but never received a degree.

“For those who did get a degree, but have above average loan debts as well as other types of debts, there is no question that at a certain level, debt will exceed the upper limits of the debt to income qualification ratios,” he said.

Potential lenders want to know if you can afford to pay back the money you borrowed.

Millennials and Gen-Xers are relying more heavily on loans to fund their educations nowadays. The Federal Reserve estimates the average amount of undergraduate student loan debt for the class of 2014 at just over $33,000, a substantial increase from $18,600 in 2004.

A 2014 analysis conducted by the Pew Research Center showed that from 1992 to 2011, college students are borrowing more money in all income groups, ranging from low to high income brackets. The standard amount of cumulative student debt for their undergraduate degree increased from $12,434 for the class of 1992-93 to $26,885 for the class of 2011-12 (figures adjusted for inflation).

By 2012, “a record share of the nation’s new college graduates or 69 percent” had used student loans to finance their degrees and the “typical amount they had borrowed was more than twice that of college graduates 20 years ago,” the report said.

Categorizing student loans as good debt is a misnomer, because lenders are examining a consumer’s debt to income ratio and the odds that they can make monthly payments on time, said Jeff Golding, chief growth officer at IRH Capital, a Northbrook, Illinois-based financial company.

“Potential lenders want to know if you can afford to pay back the money you borrowed,” he said. “If you are maxed out on all your loans, you have already extended all the credit that’s been given to you.”

High Rent and Other Factors

Other issues hindering millennials from buying a home is the ability to save up enough money for a downpayment. Until the increase in monthly rent prices throughout the U.S. for apartments and other housing is abated, it poses a “substantial” barrier for Gen-Yers to save an adequate amount of money, Smoke said.

“Unfortunately, rents continue to rise as a result of record numbers of renters and low vacancies, so this situation will not get better until we see a substantial increase in the construction of affordable housing,” he said.

Several reports and studies have shown that millennials are returning home and living with their parents while they obtain full-time jobs or establish their careers.

“The state of the economy has interfered with their ability to maintain a steady income and this has likely delayed marriage,” said David Reiss, a law professor at Brooklyn Law School. “As a result, they are less likely to become homeowners.”

What’s more, the lack of job security in the current economy has dampened many people’s enthusiasm to own a home.

“Buying a home is a big commitment to your future self and your family: ‘I will make that mortgage payment come hell or high water,’ ” he said. “Fewer people are going to want to make that commitment if the job market does not give them a reasonable basis to believe that they can live up to it.”

Housing Starts Hit 7-Month Low; Setback Seen as Temporary

FILE - In this Wednesday, March 25, 2015, file photo, apartment buildings under construction are seen, in Maitland, Fla., a suburb of Orlando. The Commerce Department reports on October U.S. home construction Wednesday, Nov. 18, 2015. (AP Photo/John Raoux, File)WASHINGTON — U.S. housing starts in October fell to a seven-month low, weighed down by a steep decline in the construction of multifamily homes, but a surge in building permits suggested the housing market remained on solid ground.

While the drop in groundbreaking activity reported Wednesday by the Commerce Department implied a moderation in residential investment early in the fourth quarter, it did little to change the view that the Federal Reserve would hike interest rates next month.

“Overall, fundamentals for the sector remain solid. Household formation is rising, demand for new homes is outstripping supply, and homebuilder confidence remains near its highest level in a decade,” said Michelle Girard, chief economist at RBS in Stamford, Connecticut.

Groundbreaking dropped 11 percent to a seasonally adjusted annual pace of 1.06 million units last month, the lowest level since March, the Commerce Department said. October marked the seventh straight month that starts remained above 1 million units, the longest stretch since 2007. Building permits increased 4.1 percent to a 1.15 million-unit rate.

Rapidly rising household formation, mostly driven by young adults leaving their parental homes and a strengthening labor market, is supporting the housing sector.

Highlighting the housing market’s underlying strength, a second report from the Mortgage Bankers Association showed applications for loans to purchase homes jumped 6.2 percent during the week ended Nov. 13 from a week earlier.

In the wake of the soft October housing numbers, Barclays trimmed its fourth-quarter gross domestic product estimate by one-tenth of a percentage point to a 2.2 percent annual rate.

Housing has contributed to GDP growth in each of the last six quarters, adding 0.2 percentage point to the third-quarter’s 1.5 percent growth pace.

“Homebuilding may not keep the Fed from ‘liftoff’ but it will be their biggest concern. When Fed officials say they want to see more investment spending this recovery, they really mean residential housing construction,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

Minutes of the Fed policy-setting committee’s Oct. 27-28 meeting showedofficials rallied behind a possible December increase in the U.S. central bank’s benchmark overnight interest rate.

U.S. stock markets were trading higher, with the S&P homebuilding index rising 2.15 percent. D.R. Horton (DRI), the largest U.S. homebuilder, gained 1.69 percent. Lennar (LEN), the nation’s second-largest homebuilder, advanced 2.22 percent.

The dollar was flat against a basket of currencies. Prices for longer-dated U.S. government debt pared their losses.

Land Labor, Shortages

Economists had forecast housing starts dropping to only a 1.16 million-unit pace last month. Many viewed the weakness in October as being related to land and labor shortages, constraints that have been flagged by homebuilders.

“Structural issues including a shortfall in immigrant labor are inhibiting construction. The supply shortage in the single-family market is not likely to be alleviated any time soon,” said David Nice, an economist at Mesirow Financial in Chicago.

Groundbreaking on single-family home projects, the largest segment of the housing market, fell 2.4 percent to a 722,000-unit pace in October. Single-family starts were pulled down by a 6.9 percent plunge in groundbreaking activity in the South, where most homebuilding takes place. Single-family starts rose in the Northeast, the Midwest and the West.

Starts for the volatile multifamily segment plunged 25.1 percent to a 338,000-unit pace.

Single-family building permits rose 2.4 percent last month to their highest level since December 2007. Single-family permits in the South also hit their highest level since December 2007. Multifamily building permits increased 6.8 percent.

“The October permit requests were above the starts number, and for the past three months permits have been running a little ahead of the building pace, so don’t be surprised if housing activity rebounds solidly in November,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Fed Pushed Toward December Hike Last Month, Despite Concern

Federal Reserve YellenWASHINGTON — A solid core of Federal Reserve officials rallied behind a possible December rate hike at the central bank’s last policy meeting, but central bankers also debated evidence the U.S. economy’s long-term potential may have permanently shifted lower.

After a summer and early fall that saw the Fed rattled by U.S. market volatility and a sell-off in China, “most” participants felt conditions for a rate hike “could well be met by the time of the next meeting,” minutes of the Fed’s Oct. 27-28 meeting released on Wednesday said.

The decision was made to make an unusually direct reference in their post-meeting statement to a possible December rate hike, with only “a couple” of members expressing concerns about setting too strong an expectation of action, according to the minutes. Staff outlined how the Fed had potentially fallen behind in communicating its intentions, with markets pushing expectations of an initial rate hike into next year.

The U.S. financial system appeared to have weathered the turbulence in global financial markets without any sign of systemic stress.

The language in the October statement drew those expectations quickly back to December.

“The U.S. financial system appeared to have weathered the turbulence in global financial markets without any sign of systemic stress,” the minutes said. “Most participants saw the downside risks arising from economic and financial developments abroad as having diminished and judged the risks to the outlook for domestic economic activity and the labor market to be nearly balanced.”

But despite the faith in the near-term outlook, the Fed also debated what could become a core concern as it enters its first policy tightening cycle in a decade — the underlying potential of the U.S. economy.

The debate took the form of a discussion of the equilibrium real interest rate — the policy rate, net of inflation, that would be consistent with full employment and the Fed’s 2 percent inflation goal. Central to many macroeconomic models, the estimated equilibrium rate forms a barometer of sorts for how far current rates are from “normal,” and how much stimulus the central bank has built into the system.

According to staff estimates, the equilibrium rate likely fell below zero during the crisis, has only recovered a bit, and is “close to zero currently.”

For the Fed that may mean little room to maneuver if it wants to avoid tightening financial conditions too quickly, and may mean that it will never get too far from the zero lower bound.

The concern is serious enough that “several” Fed officials felt it would be “prudent” to plan for other ways to stimulate the economy if low rates become permanently embedded.

Tight Inventories, Rising Prices Hurt Home Sales

Existing U.S. Home Sales Rise to Second-Highest Since 2007
WASHINGTON — Home resales fell in October as a persistent shortage of properties limited choice for potential buyers and pushed up prices, suggesting some softening in the pace of the housing market recovery after strong gains early this year.

Still, housing remains on solid footing, with sales for the full year on track to be the best in eight years. That should see housing take up some of the slack from a chronically weak manufacturing sector.

The housing market is in decent shape but could be a lot better if people decided they were ready to move and listed their homes.

“The housing market is in decent shape but could be a lot better if people decided they were ready to move and listed their homes,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The National Association of Realtors said Monday existing home sales declined 3.4 percent to an annual rate of 5.36 million units. September’s sales pace was unrevised at 5.55 million units and was the second highest since 2007.

The drop in sales was expected after contracts to purchase previously owned homes fell for two straight months. But with a tightening labor market, marked by a 5 percent unemployment rate, housing fundamentals are fairly healthy.

In addition, the government has taken steps to ease lending standards for young adults. However, an anticipated interest rate hike next month by the Federal Reserve could make housing a bit expensive, especially if there is no significant pick-up in wage growth.

“There is every reason to expect that the demand for homes will grind higher in the coming months. While interest rates are set to rise, so are incomes, and that will keep housing affordability historically favorable,” said Matthew Pointon, property economist at Capital Economics in New York.

The weak sales come on the heels of reports last week showing a drop in housing starts in October and a decline in confidence among homebuilders. Economists had forecast sales falling to a rate of 5.4 million units last month.

The dollar rose to an eight-month high against a basket of currencies, while prices for U.S. government debt were up marginally. The housing index rose 0.3 percent as the shortage of houses for sale was seen boosting homebuilders such as D.R. Horton (DRI) and Lennar (LEN).

A separate report showed Markit’s Purchasing Managers Index hit a 25-month low in early November, highlighting continued weakness in the factory sector. The decline, however, brought the PMI in line with the Institute for Supply Management survey, which has a longer history of tracking the manufacturing sector.

Pain in the West

October home sales were up 3.9 percent from a year ago and held above their average for the year. Sales dropped 8.7 percent in the West from the prior month and fell 3.2 percent in the South. These two regions, which are experiencing strong population growth, have seen large price increases due to tight inventory.

The supply squeeze is mostly hurting the lower end of the market, where sales have dropped sharply from a year ago.

Last month, the number of unsold homes on the market fell 2.3 percent from September to 2.14 million units. Supply was down 4.5 percent from a year ago, a worrying sign as housing heads into a quiet season, the NAR said.

At October’s sales pace, it would take 4.8 months to clear the stock of houses on the market, up from 4.7 months in September. A six-months supply is viewed as a healthy balance between supply and demand.

With inventories tight, the median house price increased 5.8 percent from a year ago to $219,600. October’s price increase marked the 44th straight month of year-on-year gains.

Although higher prices could sideline potential buyers, especially those wanting to purchase a home for the first time, they are boosting equity for homeowners, which could encourage them to put their homes on the market.

Realtors and economists say insufficient equity has contributed to the tight housing inventories. Last month, the share of first-time buyers crept up from September to almost a third. But the share was still the second lowest since 1981 on an annual basis.

“First-time home buyers continue to be crowded out by competition from investor sales. Price pressures from low inventory present another headwind to first-time buyers,” said Derek Lindsey, an economist at BNP Paribas in New York.