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New Home Sales-8/30

Today's release of New Home Sales figures for July were yet another indication that this year's rise in interest rates has yet to impact the consumer's desire to spend.

July New Home Sales came in at a much stronger than expected 980,000, compared to the 920,000 consensus estimate. The figures were the second highest ever, and occurred despite rising mortgage rates and a Fed rate hike.  June figures were also revised up to 979,000 from 929,000.

The strongest gains in New Home sales occurred in the Northeast and Midwest.  The gains in the Midwestern rustbelt occurred amidst the backdrop of a manufacturing sector that has recently begun to show new signs of life, and with that new life has come a pickup in consumer confidence in the region's industrialized areas.

The West was the only area to show a decline, as new home sales fell to 249,000 from June's revised 286,000. The region has been the hardest hit by the materials shortages and labor market tightness that have developed in the home building industry, and the decline in sales was more likely due to builders' supply constraints than to an actual decline in demand.

The supply of new homes remained at a low 3.8 months, a level which will likely produce a pickup in building activity during the third and fourth quarters.

The strength of the housing market despite a sharp runup in mortgage rates, and the ripple effect it has on related sectors of the economy, points to an economy that is still going full steam despite two Fed rate hikes and a 130 basis point rise in long term yields from last year's lows.

The strong housing market, when coupled with the pickup in manufacturing activity we expect this quarter as inventories are replenished, and the corresponding rise in labor shortages, indicates that the Fed's job is far from done.

With the consumer basking in the psychologically beneficial glow of this year's sharp runup in equity prices, it will take much more than two quarter point rate hikes to slow the consumer.  When you're looking at a 50% rise in the value of your portfolio of Dow Industrials and NASDAQ stocks since last October's lows, the 1/2% hike the Fed has thrown your way is unlikely to dim your desire to spend. 

 

 
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Last modified: April 08, 2001

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