New Home Prices Up 20% While Sales Are Down 24.3%

The prices of new homes are far higher than they were a year ago and far fewer are being purchased, data from the Census Bureau showed Friday.

The median price of a new home sold in August was $390,900 for the second month in a row. That is the highest price on record and 20 percent above last August’s level. The average price of a new home in 2020 was $336,000.

“After the volatility of 2020, with significant declines for new home sales in the spring followed by an unsustainable rebound during the second half of the year, new home sales have cooled somewhat,” said National Association of Home Builders Chief Economist Robert Dietz. “Home prices are up 20% from a year ago due to higher construction costs, and these price hikes are a risk for housing affordability as we approach the end of the year.”

The number of homes in August was 24.3 percent below last August’s level, suggesting that the high prices of homes are keeping some would-be buyers out of the market. New homes sold at a seasonally adjusted annualized rate of 740,000 in August, beating expectations for sales of 708,000. July sales were revised up from 708,000 to 729,000.

A year ago—as Americans rushed to buy houses to accommodate social distancing and working and schooling remotely, as well as to retreat from cities afflicted by anti-police protests, rioting, looting sprees, and rising murders—the sales rate was 977,000.

A protester raises a fist near a fire during a demonstration outside the White House. (Photo by Samuel Corum / AFP) (Photo by SAMUEL CORUM/AFP via Getty Images)

Pricier homes make up an increasingly large part of the market. A year ago, homes priced at $500,000 or more made up 16 percent of sales. Last month, homes in that price bracket 31 percent. Homes priced between $200,000 and $299,999 have gone from 37 percent of the market to 27 percent. Those between $300,000 and $399,999 dropped from 26 percent to 19 percent.

The inventory of new homes for sale is climbing, holding out some hope for relief for would-be buyers. There were 383,000 for sale at the end of August, up 100,000 from last August and 12,000 above the July level. At the current sales rate, that is a 6.1 months of supply, slightly above the long-term average.

As a candidate, Joe Biden promised to increase the supply of affordable housing. But in President Biden’s first eight months in office, prices of goods, services, and housing have soared. And single-family home construction fell in July and August despite rising prices for new homes.

Many of the housing officials in the Biden administration regard single-family housing as detrimental to the climate and racial equity. They are developing plans to make it relatively more costly to maintain single-family zoning and construction new single-family homes compared with apartments and attached homes.

In early September, the Biden administration announced a plan that claims would “create, preserve, and sell to homeowners and nonprofits nearly 100,000 additional affordable homes for homeowners and renters over the next three years.” Some housing market experts believe the plan will not accomplish enough to make housing affordable.


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Fed Forecasts Higher Unemployment, Worse Inflation, Lower Growth

The economy looks significantly worse now than it did three months ago.

Federal Reserve officials downgraded their expectations for the economy, lowering their forecasts for growth and raising forecasts for unemployment and inflation, according to materials released Wednesday at the conclusion of the Fed’s two-day monetary policy meeting.

The new projections show the median expectation is for the economy to grow at an inflation-adjusted 5.9 percent this year, down from an expectation for seven percent growth at the June meeting.

Consistent with the view of slower growth, Fed officials also see unemployment higher than they did earlier this summer. The median forecast for the unemployment rate at the end of the year is 4.8 percent, compared with 4.5 percent in June.

Less growth and higher unemployment, however, are not expected to bring down inflation. Quite the opposite. The median forecast for inflation this year rose to 4.2 percent from 3.4 percent. Core inflation, which excludes food and fuel prices, is now expected to come in at 3.7 percent, up from three percent.

Both core and headline inflation are expected to be slightly higher next year, as well, and then to settle in at 2.1 percent in 2024.

GDP growth for 2023 was revised higher, indicating that Fed officials think supply chain disruptions will push growth off into the future rather than create a permanent drag. The expectations for unemployment beyond next year were unchanged.

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Fed Signals ‘Taper’ Coming Soon, Indicates Rate Hike Could Come Next Year

The Federal Reserve said that a reduction of the size of its monthly bond purchases may “soon be warranted” if the economy continues to progress as expected and the forecasts of Fed officials moved the first rate hike forward from 2023 to 2022.

Indicators of economic activity and employment have continued to strengthen, the Fed said in a statement at the conclusion of its two-day meeting. The Fed credited this strength to progress on vaccinations and “strong policy support.”

The Fed has been buying at least $80 billion of Treasuries and $40 billion of mortgage-backed securities each month. Last December, the Fed said it would continue the program until “substantial further progress” had been made toward its legally prescribed goals of maximum unemployment and price stability.

The Fed’s statement on Wednesday appeared to indicate that the Fed expects to hit that point in the near term. Many Fed watchers think the Fed will begin reducing bond purchases after its November or December meetings, with the balance of analysts on the side of a November announcement. There is no meeting scheduled for October.

“Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” the Fed said.

As expected, the Fed left its overnight interest rate target pegged to zero to 0.25. The Fed is not expected to lift that rate until sometime after it has stopped purchasing bonds. Fed chair Jerome Powell has repeatedly emphasized that the conclusion of the bond purchasing programs will not automatically lead to rate hikes.

The projections of members of the Federal Open Market Committee, which sets monetary policy, show that the medium expectation is for no hikes in 2021, one hike in 2022. At the June meeting, the median projection in the so-called “dot plot” that tracks the anonymous forecasts of Fed officials had no hikes in 2022. Further out, the median forecast is for the target to rise to 1.0 in 2023, up from 0.6 at the June meeting. This was the first time the Fed released projections for 2024 and those show a median expectation of 1.8 by the end of that year.

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Existing Home Sales Fall as Bidenflation Pushes First Time Buyers Out of Market

Sales of previously owned homes in the U.S. fell in August as prices climbed to record highs and first-time purchases plunged, the National Association of Realtors said Wednesday.

Total existing-home sales dropped 2.0 percent from July to a seasonally adjusted annual rate of 5.88 million in August. That was slightly below the consensus forecast. Sales fell 1.5 percent from a year ago.

“Sales slipped a bit in August as prices rose nationwide,” said Lawrence Yun, NAR’s chief economist. “Although there was a decline in home purchases, potential buyers are out and about searching, but much more measured about their financial limits, and simply waiting for more inventory.”

The median price of an existing home sold in August rose to $356,700, an increase of 14.9 percent from August of 2020. Compared with a month earlier, however, prices actually declined nine-tenths of a point. Real estate professionals emphasize annual gains over month-to-month comparisons because the latter can be volatile, skewed by the mix of homes being sold in a given month, and subject to seasonality.

The median price of single-family homes was 15.6 percent above the year-ago level. Condos and coops were up 10.8 percent annually. Median prices are not seasonally adjusted. Both were below the July level.

The market for high-priced homes is growing rapidly, while the market for low-priced homes has contracted. Sales of homes valued at one million dollars or more were up 40.1 percent from a year ago and sales of homes priced between $750,000 and $1 million were up 40.3 percent. Each of those segments accounted for six percent of overall sales. Sales of homes priced in the $500,000 to $750,000 range were up 31.1 percent. These made up 16 percent of the market.

Sales were up just 7.5 percent in the $250,000 to $500,000 range, the largest part of the existing home market with 43 percent of all sales. Sales were down 20.3 percent for homes priced between $100,000 and $250,000, the second-largest market segment 25 percent, and down 23.9 percent in the much smaller market—just four percent of all sales—for less expensive homes.

Although President Joe Biden has made expanding homeownership a prominent goal of his administration, his policies so far have failed. First-time buyers accounted for 29 percent of sales in August, down from 30 percent in July and 33 percent in August 2020.  Prior to 2006, first-time buyers typically made up around 40 percent of the market. Following the bursting of the housing bubble, first-time home buyers have averaged around one-third of the market, so the August figure is below average. The NAR’s research indicates that last year’s average was 31 percent.

(Photo by Scott Olson/Getty Images)

“Securing a home is still a major challenge for many prospective buyers,” said Yun. “A number of potential buyers have merely paused their search, but their desire and need for a home remain.”

Homes are selling quickly. Properties typically remained on the market for 17 days in August, unchanged from July and down from 22 days in August 2020. Eighty-seven percent of homes sold in August 2021 were on the market for less than a month.

Sales of single-family homes fell 1.9 percent in August, on a seasonally adjusted basis. Not seasonally adjusted, sales fell 1.2 percent. Existing condominium and co-op sales were recorded at a seasonally adjusted annual rate of 690,000 units in August, down 2.8 percent monthly but up 9.5 percent from a year ago.


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Dow Plummets 614 Points as Fear of China Contagion Takes Hold

U.S. stocks fell sharply on Monday as investors worried about contagion from China.

The Dow Jones Industrial Average fell by 614 points, around 1.8 percent. The S&P 500 fell 1.7 percent. The Nasdaq Composite dropped by 2.2 percent. The small-cap Russell 2000 declined 2.4 percent.

All of the major indexes had been down by more earlier in the day before rebounding in the final hour of trading.

Investors are worried about financial and economic contagion from the potential collapse of a giant Chinese property developer—rather than viral contagion from coronavirus.

These are the biggest declines in the major indexes in several months. The sell-off was broad-based, with all 11 sectors of the S&P in the red. The energy sector was off by a steep three percent. Financials fell 2.2 percent, dragged down by a 2.9 percent decline in bank stocks. The automobile sector fell four percent.

Homebuilder stocks also saw a steep sell-off despite a better than expected report from the National Home Builders Association. Shares of D.R. Horton fell 4.2 percent after the company said ongoing supply chain disruptions were forcing it to lower its guidance for sales this year. The broader construction sector fell 2.7 percent.

Many on Wall Street pointed to the potential failure of property developer China Evergrande Group as the source of Monday’s sell-off. Evergrande’s debt burden is the biggest for any publicly traded real estate management company in the world, according to the Wall Street Journal.  The company has about $355 billion in assets and employs 200,000 workers. Many analysts say it is unclear whether the Chinese government will let Evergrande fail or act to support it so that it can continue to pay its creditors. Alternatively, the Chinese government could allow the company to default on bond payments owed to outside bond investors while preserving its ability to pay employees and trade creditors.

Chinese dictator Xi Jinping has been cracking down on some of the biggest Chinese companies and wealthiest businessmen, including levying fines against Alibaba and Tencent and advising business leaders to “self-rectify” their misconduct.

“In his overriding quest for re-election to a record third term at the 20th Party Congress in fall 2022, Mr. Xi has apparently chosen to put the solidification of his own domestic political standing ahead of China’s unfinished economic reform project,” former Australian Prime Minister Kevin Rudd wrote in an op-ed for the Wall Street Journal.

“The Chinese President is not just trying to rein in a few big tech and other companies and show who is boss in China,” the Wall Street Journal reported on Monday. “He is trying to roll back China’s decadeslong evolution toward Western-style capitalism and put the country on a different path entirely, a close examination of Mr. Xi’s writings and his discussions with party officials, and interviews with people involved in policy making, show.”

Xi has for years been attempting to discourage speculation in real estate and may see the teetering of Evergrande as a way of bringing discipline into an important part of the Chinese economy.

Broad stock indexes were down in London, Paris, and Germany. Japan’s Nikkei was a half a percentage point in positive territory.

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Homebuilder Sentiment Rises for First Time in Five Months

Builders of single-family homes in the U.S. are feeling a bit better about the industry.

A gauge of homebuilder sentiment ticked up in September, the first month-to-month gain for the index since April, to a score of 76, the National Association of Home Builders said Monday.

Economists had forecast the  NAHB/Wells Fargo Housing Market Index to remain at the 75 level hit in August.

Homebuilder sentiment initially plunged in the early days of the pandemic, only to soar rapidly as it became clear that working from home and social distancing desires were driving up demand for houses. The index, which has averaged 52 in data going back to 1985, jumped to 90 in November, the all-time high.

But labor shortages and skyrocketing lumber costs took their toll on homebuilder sentiment and the index has been slowly declining for most of 2021.

Lumber prices, however, have come down dramatically, falling from a high of $1,600 per 1000 board feet in May to around $400 recently.

Two of the indexes components, current sales conditions and foot traffic, improved. Expectations for sales six months into the future held steady. All three are elevated compared with historically normal levels.

The changes in builder sentiment were uneven around the country. The Northeast and the West saw sentiment fall in September to the worst levels since last summer. The Midwest and the South rose.

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Biden Administration Pushes Congress to Require Banks to Turn Account Info Over to IRS

The Biden administration is pressuring lawmakers to enact a controverisal plan requiring banks to turn over to the Internal Revenue Service detailed information about inflows and outflows of almost all American bank accounts.

Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig sent letters to lawmakers this week asking Congress to include in tax hike legislation a requirement that banks report annual transaction data on accounts with $600 or more or that have $600 worth of transaction over the year, the Wall Street Journal reported.

The result would be the collection of detailed data about the bank transactions of tens of millions of everyday Americans.

The aim is to help the I.R.S. collect taxes from individuals and businesses on unreported income and to create more leads for audits.

The Biden administration claims the additional information would result in the IRS collecing an additional  $460 billion over a decade. The administration wants to use this additional revenue to offset some of the new spending for expanded government social policies and green new deal schemes Congress is currently considering.

The proposal did not make it into the list of tax change proposals put together by House Democrats. The Wall Street Journal reported that absence is a sign that the proposal lacked support among Democratic lawmakers.

Financial institutions say it would impose a costly compliance burden that would be especially difficult to manage for smaller banks and credit unions. Critics have also said that the IRS lacks the ability to rationally analyze the enormous amount of data it would receive.

Critics of the proposal also warn that the proposal would create a centralized database of nearly all Americans’ bank accounts, loans, and investment accounts—a likely target for hackers and spies. The risks of such a database were highlighted last year when the leftwing investigative journalism website Pro Publica said it had “obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years.”  If this proposal had been in place at the time, Pro Public might also have data on bank credits and debits.

In her letter, Yellen argues that tax compliance is much higher when people know that the IRS has data on their income. In other words, even if the IRS cannot effectively analyze the data, just the fact that it has it might persuade Americans to report income that might have gone unreported.

“Wage and salary income is reported to the IRS on W-2 reports, and tax obligations are automatically withheld, so compliance rates stand at 99 percent,” Yellen wrote. “It is clear that when taxpayers know that this information exchange exists, their voluntary compliance rises.”

Banks and other financial firms already report interest, dividend, and investment income to the IRS. Wages get reported to the IRS and the Social Security Administration.

The IRS can summon bank account information during audits but taxpayers can fight these requests by showing they are for an illegitimate purpose or irrelevant to the inquiry.

Yellen claims in her letter that although the IRS would receive bank information on Americans of all incomes, the proposal is aimed at collecting more taxes from the wealthy. Lower income Americans would benefit, according to Yellen, because they would allegedly be at lower risk of an audit.

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Inventory Growth Slows as Businesses Struggle with Supply Chains and Inflation

The pace of inventory accumulation by U.S. businesses slowed in July but the extent of the slump was partially hidden by high inflation.

Business inventories rose 0.5 percent following a 0.9 percent increase in June, the Commerce Department said on Thursday.

Inventories are a key part of the calculation of gross domestic product. And inventory growth is often a signal of rising business confidence and a growing economy.

But the message of the June and July inventory accumulation is less clear because of inflation. The inventory numbers are reported in nominal figures, not adjusted for inflation. That’s not a problem when inflation is mild. But when inflation picks up, as it has this year, growth in nominal numbers can actually signal contractions in output.

The Producer Price Index for processed goods for intermediate demand, a rough proxy for inventory spending, rose 1.9 percent in June and 1.7 percent in July. In other words, when adjusted for rising prices, inventories actually contracted in those months.

Inventories rose 7.2 percent on a nominal year-on-year basis in July. But the PPI for intermediate demand was up 23 percent.

What this indicates is that although businesses were spending more for inventories, they were accumulating less of the products for their inventories. That makes sense as June’s factory orders declined when adjusted for inflation.

Retail inventories gained 0.4 percent in July, a tick below June’s 0.5 percent rise.

Auto inventories rose 0.2 percent, held back by the persistent shortage of semiconductors that has forced automakers to cut back on production.

Retail inventories excluding autos, a category used for the calculation of GDP, rose 0.5 percent..

Shortages, supply chain issues, and congested ports have been hampering efforts of businesses to replenish inventories. As well, some businesses may be worried that high prices could drive off customers.

Wholesale inventories increased 0.6 percent.  Manufacturing inventories rose 0.5 percent.

Business sales rose 0.5 percent in July after rising 1.6 percent in June.  When measured against the Producer Price Index for final demand, which rose around one percent in both months, July signaled a real contraction after June’s real growth.

At July’s sales pace,  businesses have around 1.25 months worth of inventory.

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Business Expectations for Inflation Climb to Fresh High

American businesses’ expectations of future inflation hit a record high last month, according to a report released Wednesday from the Federal Reserve Bank of Atlanta, potentially undermining confidence among Fed officials that inflation pressures will ease over time.

The Atlanta Fed’s survey of U.S. businesses found that inflation was expected to be runing at a rate of 3.1 percent 12-months from now, one-tenth of a point higher than the previous month’s survey. This is the highest expected rate of inflation in data running back to 2012.

The long-term average for this series is 2 percent.

In a possible warning that the U.S. could face low growth and high inflation, expected sales levels “compared to normal” decreased to a neutral level.

Long-term expectations, over the next decade, remained at three percent, also a record high and three-tenths higher than the long term average prior to this year.

The data on the expectations of businesses aligns with consumer views of inflation. On Monday, the Federal Reserve Bank of New York said that in August U.S. consumers saw inflation a year from now at 5.2 percent, up from expectations of 4.9 percent last month. Three years from now, consumers anticipate inflation will be at four percent, up from 3.7 percent in July. Those were both record highs in data going back to 2013.

Fed officials, including chair Jerome Powell, continue to argue that they believe inflation will prove transitory and price pressures will ebb over time.  Several Fed officials, however, have said they believe the Fed should begin reducing its bond purchases this year, indicating that the central bank has not been put off the taper plan by the weak August jobs number.

Some Fed officials have begun openly saying they no longer see inflation as transitory.

Cleveland Fed President Loretta Mester said last week that she no longer see that as the best description of inflationary forces in the economy. Instead, the price increases are likely to persist for longer than policymakers thought in the first half of this year.

“My own modal forecast is for inflation to remain high this year and then to begin to move back down next year; however, I see upside risks to this forecast,” Mester said.

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