While sales at building-materials stores fell in August by 0.5% compared to July’s sales, they are still ahead of 2016 by a robust 7.4%. But, as the chart below shows, sales have been relatively flat this year, hovering around $31 billion every month since February. Most of the sales gain occurred in the second half of last year, when sales increased steadily each month until they peaked in February at $31.4 billion.
Sales at appliance stores fell again in July, by 14% compared to the same month last year. In fact, sales have been in freefall for well over a year, but the decline has been much more pronounced this year. This is shown in the chart below, where each line represents the monthly sales for a given year.
It’s clear that the red line, which depicts sales this year, is much lower than the lines corresponding to the three previous years. Moreover, the gap has widened over the last three months.
However, it should be noted that the decline shown in the chart reflects the shift of sales toward big-box stores, like Home Depot or Lowe’s, but also Best Buy and Amazon. All of these retailers are gaining share at the expense of traditional appliance stores.
Retail sales overall fell 0.3% in August, a slightly better performance than the drop in sales at building-materials stores mentioned above. But compared to last year, total retail sales are 3.5% higher, lagging building materials.
And consumer prices moved up at a faster pace in August. The Consumer Price Index (CPI) in August was 1.9% higher than a year ago. This is slightly higher than the preceding two months, but, as can be seen in the chart below, prices have reversed their declining trend virtually since the beginning of the year. However, the primary reason behind the faster inflation rate at the beginning of the year was energy prices, which were rising at an average 12.5% in the first quarter of 2017.
Aside from the fact that rising prices impact consumers directly, they have an effect on economic policy. Federal Reserve Bank economists have adopted a rule that a 2% inflation rate is equivalent to price stability. If the CPI rises faster than 2%, the Fed takes that as a signal that inflation may be festering and it’s a call for the bank to raise interest rates.
If the current trend continues, it’s likely that the Fed will begin to tighten with the result that interest rates, and thus the mortgage rate, will rise, hampering any further improvements in the construction markets.
So far, the mortgage rate has remained unchanged; it was at 3.78% last week. This is the lowest the mortgage rate has been since November of last year, when it was 3.57%.
We have stated before that mortgage rates, which are often an impediment for home-ownership, have been very favorable for several years now. But other factors — like low income growth and burdensome student debt — which could prevent many consumers from achieving the home-ownership dream.
Manuel Gutierrez, Consulting Economist to NKBA
Explanation of NKBA’s Economic Indicators Dashboard
The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.
Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.
Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.
Single-Family Starts. This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.
Existing-Home Sales. These data are issued monthly by the National Association of Realtors, and capture the number of existing homes that were sold in the previous month.
High-End Home Sales. This series are sales of new homes priced at $750,000 and higher. The data are released quarterly by the U.S. Department of Commerce, and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.
Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.
Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.
Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.
Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers, for instance.
We hope that you find this dashboard useful as a general guide to the state of our industry. Please contact us if you would like to see further detail.
