Housing - E-commerce Sales Growth

Let's go over e-commerce sales before getting into housing starts. Q3 e-commerce sales growth was only 3.1% on a quarter over quarter annualized basis. That fell from 3.6% in Q2. Q2’s growth rate was revised down from 3.9%. This is in tune with the October retail sales report which shows e-commerce growth slowed.

It’s still way ahead of overall retail sales. Q3 retail sales were up 0.9%. E-commerce sales as a percentage of total sales was up 0.2% to 9.8%.

Firms like Target are investing heavily into online sales with same day delivery. It’s not a surprise to see e-commerce sales growth slowing. It will slow in relation to overall growth as it increases its share.

Cyber Monday should still be great though.

As you can see from the chart below, the retail survey this Wednesday before Thanksgiving is stronger than last year. This holiday season will be the last strong one of this cycle. The labor market won’t be as strong in 2019. The Redbook same store sales report showed growth of 6.2% in the week of November 17th. That is up from 6.1% growth in the prior week.

Target’s CEO is telling the truth when he says the consumer is strong. The problem is many headwinds will change that in the next year.

Housing - Weak Housing Starts

The housing market has been weakening for the past few months. So it’s no surprise that housing starts missed estimates.

They came in at 1.228 million in October which missed estimates for 1.24 million. The September starts were revised from 1.201 million to 1.210 million. This month can be compared to last month because the data is seasonally adjusted.

Good news is housing permits beat estimates as they were 1.263 million which beat the consensus of 1.26 million. September results were also revised higher from 1.241 million to 1.270 million. That means permits fell 0.6% from September.

It’s important to recognize this report in comparison to the housing market index isn’t apples to apples. This is from October and the HMI was from November.

We’ll need to wait another month to see if the HMI survey was off base or accurate. Multi-family housing starts were up 10.3% to a rate of 363,000.

That’s great news because many cities with affordability crises need more multi-family housing units. Single family starts fell 1.8% to a rate of 865,000. Hurricane Michael didn’t affect results as starts in the south were up 4.7%.

Housing - Starts Strong in the Midwest and Weak in the Northeast

This makes sense because the Midwest has the most affordable housing. And housing isn’t affordable in northeast.

Expensive housing in the northeast implies the region needs a greater supply of homes. The problem is there aren’t as many areas to build new housing as there are in the Midwest. That's because it’s more developed and populous.

Expensive land drives prices up, so housing supply isn’t the only issue. Unless you’re going to build a tiny home, housing is relatively expensive in the northeast.

As you can see from the chart below, out of the past 6 cycles, this cycle will have the lowest peak in housing starts. That is, unless housing starts accelerate higher in the next few quarters.

The current rate of starts looks more like a recession than the end of an expansion. The second chart below shows the large disparity in the 2010s compared to the cycles since the 1960s.

One potential cause of this is the overbuilding in the last cycle. There are also regulations which prevent building multi-family housing in cities.

Finally, even though 27 is the most common age in America, millennials are delaying home buying. Home prices aren’t affordable.

(Click on image to enlarge)

Permits for single family and multi family houses were down 0.6% and 0.5%. The west was the worst region as permits dropped 7.9% month over month and 17.2% year over year.

On a year over year basis, housing starts were down 2.9% and permits fell 6%. Completions fell 3.3% monthly and 6.5% yearly. Single family completions fell 1.2% and multi-family completions fell 9.1%.

Housing - MBA Purchase Applications

For the week of November 16th, the MBA composite index for mortgage applications only fell 0.1% after falling 3.2% last week. A strong part of the report was that the purchase index increased 3% after falling 2.3% last week.

The negative part of the report was that the refinance index fell 5% week over week after falling 4.3%.

Unadjusted purchase applications fell 2% to down 5% year over year. Refinancing as a percentage of mortgage activity fell 0.9% to 38.5% which is the lowest level in 18 years.

Interest rates have been rising.

Housing - Most Refinanced When Rates Were at Historic Lows Earlier in Cycle.

As I have mentioned in previous articles, interest rates have been falling recently. This might help housing slightly.

We saw the first drop in 30 year mortgage interest rates in 7 weeks. They fell 1 basis point to 5.16%. We’re going to need a lot more of a decline than that to reverse the downtrend in housing.

Keep in mind the last two MBA mortgage application reports were from November which makes the comparison with the housing market index valid.

Both show weakness which is a terrible sign for residential investment growth in Q4. This weakness is only part of the reason GDP growth is expected to fall from 3.5% in Q3 to 2.8% in Q4 according to the median of 8 estimates in the CNBC rapid update which was last updated on November 16th.

Housing - Conclusion

E-commerce sales growth decelerated, but was solid. Retail surveys indicate this will be a strong holiday season for consumer spending.

The trend of weakness in housing continued. Some are saying the fact that housing starts weren’t a disaster is good news because the housing market index crashed on Monday.

However, I emphasized in this article the housing starts were from October. So you can’t compare the two data points. The unadjusted weakness in the MBA purchase index indicates November has been a weak month for the housing market.