Following a large increase in January, new home sales slowed as expected in February, dipping to 411,000. This setback is seen as a temporary one, as substantial positive momentum in the housing market should carry it forward in the months ahead. The outlook for continued expansion still looks relatively good.
In a separate report on housing earlier this morning, home prices surged by 8.1% on a year-over-year basis in January. That was the strongest gain since June 2006, before the housing bubble burst. While the rapid advance in home prices prior to the housing crash was an ominous sign, the recent improvement is suggestive of a strengthening market in which demand has begun outstripping supply.
Although the residential housing market represents less than 3% of GDP today, improvement in housing is still viewed as a key bellwether indicator of the impact of the wealth effect, the health of the consumer sector, and the ripple effect into the construction industry and retail sector.
The wealth effect appears to be re-emerging as a positive force supporting consumers. As such, consumer spending remains in a growth mode, despite the recent headwinds of higher taxes and diminished discretionary income. Offsetting the positive news on the housing front, consumer confidence fell sharply in March to 59.7 from 68.0 in February. Of particular note was the plunge in the expectations index, suggesting that consumers are once again experiencing greater anxiety in the outlook for the economy.
In the near term, the ability of the consumer sector to remain resilient in its spending habits will be critical to supporting growth given the headwinds of higher taxes, elevated prices at the pump, and modest wage growth. Given the mixed picture painted by economic data, it’s easy to understand the case made by either the “glass half full” or the “glass half empty” crowds. In aggregate, it seems to point to a continued modest expansion, and an economy that is neither falling off a cliff nor firing on all cylinders.
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