In a huge surprise, U.S. new home sales in September recorded the largest single-month percentage increase since 1992, a sign the market remains resilient despite two major hurricanes and a continuing inventory shortage of homes.

Purchases of newly built single-family homes swelled 18.9% in September, far above expectations. The actual number of new homes sold climbed to a seasonally adjusted annual rate of 667,000 units in September, the Commerce Department reported. That put new home sales at the highest level since October 2007 and well above the pre-report consensus of just 555,000 units.

New Single Family Homes

Both new and existing home sales had been weak through much of the spring and summer, as a shortage of inventory and rising prices have kept many would-be buyers out of the market. A recent report suggests that trend has reversed. For the year to date, new home sales are 8.6% higher compared to the same period last year.

The report was greeted with widespread surprise by economists, most of whom expected modest declines in sales in September due to hurricanes in Florida and Texas. Yet sales rebounded much sooner than expected following a storm-soaked August. They were up strongly in every region, including in the South, which was battered by hurricanes. In Texas and Florida, new homes sales surged by a whopping 25.8% last month.

In September, the median home sales price was $319,700, compared to $314,700 a year ago and up 5.2% from August. At the current sales pace, it would take just five months to exhaust all available supply. Many more homes are needed in this market that is starved for inventory.

Economists cautioned that continued rising home prices could begin to put a damper on the market in the months ahead. Yet for now, strong demand and limited supply have helped push prices up, and rising labor and material costs due to hurricane recovery efforts are likely to exacerbate the trend.

“At some point housing affordability will become a larger issue,” said Rob Dietz, chief economist at the National Association of Home Builders.

Builders reported on their most recent earnings calls that they already are beginning to see shortages of workers and materials such as sheetrock. They are attempting to control costs by stockpiling materials and leaning on longstanding relationships with contractors.

New-home sales data can be volatile and subject to revision. Thus, the huge September increase could be revised down in the months ahead. Even so, it is a huge number that no one expected.

Sales of existing homes, which represent the bulk of the U.S. market, rose only 0.7% in September from a month earlier to a seasonally adjusted annual rate of 5.39 million units, the National Association of Realtors said.

How the U.S Economy Can Sustain 3% Growth

The U.S. economy just turned in its second consecutive quarter of 3% growth in Gross Domestic Product, to the surprise of most forecasters and the mainstream media. This despite the negative effects of two major hurricanes hitting the southern U.S. late this summer.

With hurricane rebuilding efforts underway in Texas, Louisiana and Florida, retail sales, industrial production and other indicators are already showing acceleration. This suggests we could see another quarter of 3% growth or better for the final three months of this year.

The Conference Board’s Consumer Confidence Index, the Investor’s Business Daily/TIPP Economic Optimism Index, the National Association of Manufacturers survey and the Institute for Supply Management Index all report stronger optimism and rising factory output. Overall optimism hasn’t been this high in over a decade.

The current unemployment rate at 4.2% is the lowest since before the financial crisis. Total employment has jumped more than 2.2 million since Trump entered office. Even the broadest U.S. unemployment measure, the so-called U-6, now stands at 8.3% – its lowest level since June of 2007 before the Great Recession.

Meanwhile, all the major stock market indexes are hitting record high after record high, with the Dow Jones Industrial Average topping 23,000 for the first time this month – up over 30% since last November. The stock market is generally a reliable (but not perfect) predictor of future economic activity. Its message today is clear: Expect more growth.

The question is whether 3% or higher growth is sustainable, and I believe it is. I think it will be even more likely if Congress passes meaningful tax reform just ahead, which is looking more likely now that a (bloated) federal budget has been passed.

Friends and colleagues are asking me why the economy has shifted into a higher gear. As I have written here in recent weeks, I believe the national mentality has undergone a major shift to the optimistic side. A big reason for this is the change in leadership last November.

Whether you like President Trump or not, he has embarked on one of the most sweeping deregulation campaigns in recent presidential history. He got rid of President Obama’s disastrous “Clean Power Plan” and walked away from the growth-killing “Paris Climate Accord.”

He’s also removing oil and gas drilling restrictions on numerous federal lands. Along with the fracking revolution, this will make the U.S. a global energy powerhouse in the years ahead. Natural gas production has already increased to the point that we are now a net exporter for the first time in decades.

The result of all this deregulation is that tens of billions of dollars of dead weight have been lifted from the economy’s shoulders, virtually overnight. Trump’s nine months in office have been marked by pro-growth policies overall that will increase investment, boost jobs and lead to higher economic growth.

This is happening even before we get tax reform that will lower tax rates for corporations, entrepreneurs and the middle class, bringing an estimated $1.5 trillion in tax relief. That will encourage more companies to invest in plants, equipment and training and to hire more workers. So things could get even better.

Of course, if the Republicans blow it and fail to pass meaningful tax reform, that’s a game-changer. Absent that, I believe the current economic momentum is sustainable.

Now let’s take a look at the latest encouraging economic news.

The Economy Was Stronger Than Expected in the Third Quarter

The U.S. economy unexpectedly maintained a brisk pace of growth in the third quarter as an increase in inventory investment and a smaller trade deficit offset the hurricane-related slowdown in consumer spending and a temporary decline in construction.

Gross Domestic Product increased at a 3.0% annual rate in the July-September quarter after expanding at a 3.1% pace in the second quarter, the Commerce Department said on Friday. That was well above the pre-report consensus of 2.5%.

US Gross Domestic Product

The Commerce Department said it was impossible to estimate the ultimate impact of hurricanes Harvey and Irma on third quarter GDP. Yet preliminary estimates indicate that the back-to-back storms caused losses of $121.0 billion in privately-owned fixed assets and $10.4 billion in government-owned fixed assets.

Hurricanes Harvey and Irma hurt incomes and crimped consumer spending in the third quarter, especially in Texas and Florida. Growth in consumer spending, which accounts for more than two-thirds of the US economy, slowed to a 2.4% growth rate in the third quarter following a robust 3.3% pace in the second quarter.

Businesses accumulated inventories at a strong $35.8 billion pace in the third quarter in anticipation of rising demand. As a result, inventory investment contributed 0.73% to third quarter GDP growth, after adding just over 0.1% to growth in the prior quarter. It remains to be seen, of course, if inventory rebuilding will be as strong in the fourth quarter.

Exports increased at a 2.3% rate in the third quarter, while imports fell at a 0.8% pace. That left a smaller trade deficit, leading to trade adding 0.41% to GDP growth. Trade has contributed positively to GDP for three quarters in a row.

With hurricane rebuilding efforts underway in Texas, Louisiana and Florida, retail sales and industrial production are already showing acceleration. This suggests we could see another quarter of 3% or better growth in the final three months of this year.

 

Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com