Investors are still betting heavily on the Federal Reserve cutting short-term interest rates at the Federal Open Market Committee meeting next week. Right now, the belief is that the Fed will vote to ease overnight lending rates by 25 basis points. That would push the overnight lending rate down from 2.5% to 2.25%.
The overnight lending rate is the rate that banks pay when they borrow money from each other. By lowering this rate, the Fed would make it less expensive for banks to borrow money therefore hopefully passing those savings on to customers, which in turn would expectedly give a boost to the economy.
While investors feel confident about a 25 bp rate cut, analysts at Goldman Sachs say they cannot rule out the potential for 50 bp cut, especially if there is any troubling trade deal news or if there is more disappointing economic data. The Fed has been very adamant about relying on a data-driven decision when they decide to change rates. All of the data out this week supports that expected rate cut.
The quarterly Gross Domestic Product numbers out Friday morning from the Bureau of Economic Analysis show that while consumer spending is humming along, businesses are slowing investments. The second quarter real GDP grew by 2.1%. That is down from 3.1% in the first quarter. So while the economy is still growing, this does show it is slowing down significantly going into the second half of the year.
The Richmond Fed Manufacturing index saw a sharp decline of 14 points pulling it down to -12 in July, going against expectations for a minor increase. People typically watch this index as it’s released near the end of month and may give a bigger picture of inflation.
Initial jobless claims out on Thursday showed an unexpected decline in claims. It was expected that claims would go up by 3,000, but the first-time claims for state unemployment benefits fell 10,000 to a seasonally adjusted 206,000. The four-week moving average also dropped, falling by 5,750 net. The full jobs report from the Bureau of Labor Statistics comes out one week from today and should give a more detailed indication of labor market strength.
Another wrinkle in the economic picture this week was the White House and Congress reaching a deal on the budget. On Monday, the President announced via Twitter that the two sides had come to an agreement on a 2-year budget and debt ceiling deal.
Reuters reports that this brings the U.S. discretionary spending up to $1.37 trillion in fiscal year 2020. That’s up from $1.32 trillion this year. It would also allow the Treasury Department to extend its borrowing authority and prevent the U.S. from defaulting on its debts.
Remember, federal funding was set to expire on Sept. 30 this year and would lead to another government shutdown. This deal may serve to alleviate that stress and prevent another shutdown. However, lawmakers will have to pass separate appropriation bills. That might prove tricky as not all Republican lawmakers are pleased with the lack of spending cuts.
The progression of that deal will be watched closely by the Federal Reserve members as well as the progression of trade talks between the U.S. and China. The two sides are set to meet in Shanghai next week
On a broader world scale, the European Central Bank is facing its own decision on whether to ease rates. ECB President Mario Draghi has been very clear in recent weeks that he is willing to do whatever it takes to stimulate the struggling European economy. For now, rates are unchanged, however, monetary easing is expected in the coming months. The ECB has been attempting to normalize its rates since their last stimulus package in 2011, but it has not worked in the way they had hoped due to global trade wars and economic softness in China.
Home sales rebound in June, disappoint overall
New home sales bounce back in a great way in June, but the numbers for previous months have been revised lower showing an overall disappointment. June’s sales rebounded by 7% showing a good mix with the four regions showing relatively equal growth. However, revisions to previous months showed -55,000 on net.
So what is going on with home sales? Right now interest rates are still at near three-year lows. This week’s 30-year fixed-rate average from Freddie Mac is 3.75%. That is down from last week’s average.
According to a study by First American, existing home sales “were 1.5% below market potential” in June. Their study also shows that “housing market potential benefitted from a 10.7% year-over-year increase in consumer house buying power” and household wages also went up by 2.5% to support that homebuying power.
However, analysts keep circling back to the same issue holding back the housing industry right now: supply. An eye-opening statistic from First American’s study show that tenure length, meaning how long someone stays in a home they’ve purchased, has increased by 0.7% compared with one month ago. That increase in tenure length led to a loss of nearly 33,000 home sales. Part of the problem is many seniors are now choosing to age in place, holding on to their homes longer and not contributing to the turnover of existing homes.
The latest information from the National Association of Realtors shows that existing home sales dropped 1.7% in June with the median home price going up yet again, hitting an all-time high of $285,700. Perhaps most telling is the decrease in existing home sales year-over-year. Existing home sales make up about 90% of all home sales. June 2019 showed a 2.2% decrease year-over-year marking the 16th-straight yearly decline in existing home sales.
Can Americans afford to buy?
Another study out this month from John Burns Real Estate Consulting showed that, of 130 metro areas analyzed, “only 54% of Americans can afford to buy a home priced 20% below the median home price in their area” which would be considered an entry-level home for a first-time homebuyer.
According to their study, the much lower mortgage rates have only added 3% to that purchasing power. It’s generally understood that home prices in places like San Jose and San Francisco have priced many people out, but this study shows just how bad it’s gotten. In California as a whole, just 34% of people can afford to buy an entry-level home. In San Jose, that number drops to 18% while San Francisco has just 11% affordability.
The Federal Housing Finance Authority’s numbers out this week stated that home price appreciation, while still growing, has slowed down again. The FHFA index rose by just 0.1% in May against an expected 0.4% with the year-over-year rate declining slightly to 5.0% appreciation.