NKBA Indicators Dashboard
Most indicators remain strongly positive, although there are three — declines in high-end home sales and appliance-store sales, and an uptick in the mortgage rate — that could raise a red flag for the kitchen, bath and remodeling industries.
It should be noted, however, that high-end home sales figures are released quarterly, and will be updated for next week’s report. The totals are expected to turn positive, considering that home sales have been increasing over the last year. Further, appliance-store sales have been gradually losing market share to big-box stores like Best Buy or home-improvement centers like Home Depot, so while the distribution is shifting, sales of actual appliances are still healthy.
Material Stores Sales Continue to Rise
Sales of building materials rose 1.2% last month to just under $33 billion. Sales have been rising steadily since June 2017, except for a minor hiccup in October, when they fell by 0.3%.
In December, sales of building materials have increased 9.4%, from the $30.2 billion posted in December 2016.
This level of activity is consistent with the rise in remodeling. As reported last week, residential remodeling expenditures have been increasing for more than a year. Similarly, employment in remodeling firms has also been rising, but more modestly — perhaps because of the difficulty in finding skilled labor to fill open positions.
Inflation Rate Eases Modestly
Consumer prices moderated minimally last month to 2.1%, but they’re still above the 2% rate they’ve maintained since last September.
Even though 2.1% may seem like a small number, it’s important to consider this in terms of both the impact on purchasing power and its relationship to wages and wage growth.
In terms of purchasing power, a 2.1% rate means that the buying power has dropped to half its current value in 34 years. The policy of the Federal Reserve Bank to aim for 2% inflation has the effect of lowering consumer purchasing power.
And comparing the growth of average earnings to inflation reveals that consumers’ financial position has improved, albeit modestly. For the year ended in November 2017, consumers’ earnings rose by 2.5%, just 0.3% above the CPI increase of 2.2% (note the figure highlighted in the CPI chart above is for December).
Mortgage Rates Bounce Back
Last week, there was an unexpected sell-off of government securities, such as Treasury bills, that resulted in a further increase in interest rates.
Recall the simple relationship between interest rates and the price of securities. When the Federal Reserve Bank, for instance, sells Treasury bills, the sale pushes their prices down. This is a basic feature of any product sold in a free market, when the seller offers more of the goods, the buyers will be tempted only if they are offered at a lower price.
But since Treasury bills carry a fixed interest rate, say 2%, the less one pays for the T-bill, the higher the yield will be. That is, if the T-bill cost $1,000 originally it would pay $20 after its expiration. When the price drops to $990, for example, the new buyer will be paid $20 when it expires, but the effective yield to him will be 2.02%.
This general increase in T-bill rates may have helped push the mortgage rate back to 3.99% last week, although this increase is not yet sufficiently large enough to cause an appreciable impact on the housing markets.
The radical tax changes implemented in the law, such as lowering the tax rate for repatriated funds to the U.S., could have an impact on interest rates. Naturally, no one knows what will ultimately occur, one possible outcome could be that companies that bring their earnings back decide to park that money temporarily on securities, which would drive prices of those securities higher and thus push interest rates down.
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.
