The New Year usually gets off to a slow start but this year is already in full swing. If recent events are any indication – 2017 is going to be a VERY interesting year. With the media and news outlets being dominated by what’s happening in Washington DC, it’s easy to forget that the Fed just held its first 2017 FOMC Meeting Jan 31 – Feb 1. As expected, they kept the Fed Funds rate unchanged.  Now everyone’s eyes will be on the Jobs Report that will be released Friday morning (Feb 3).

January in Review

Recapping the major Economic Data releases that affect the Mortgage & Real Estate business:

• Donald Trump was sworn in as the 45th President of the United States
• The first FOMC Meeting of 2017 just ended with no change in interest rates, but……
• At a speech in January, Fed Chair Yellen said to expect “a few” interest rate hikes this year
• The DOW crossed 20,000 for the first time in history the retreated
• The Holiday shopping season was good (not great). Major department stores like Macys, Sears, and Kohls had disappointing results and many store closings were announced

Net Net – The final statistics are rolling in for 2016. They confirm what everyone in the Mortgage Biz already knew – 2016 was a good year for Real Estate and Mortgages. In fact, it was the best year for Housing since 2007 driven by higher wages, low interest rates, and new household formation.

Interest Rates and Fed Watch

Expect a few Fed Funds rate hikes sometime this year. Fed Chair Janet Yellen gave a speech at the Commonwealth Club in San Francisco on January 18th. In the speech she said her colleagues are planning on raising rates “a few times” this year because the Economy is close to its inflation and employment targets. She didn’t elaborate about when these hikes would come but said it was dependent on how the Economy evolves over the coming months.

The January FOMC statement revealed that most FOMC members were concerned inflation could heat up and shoot way past their 2.0% target. A large contributor to inflation is wages and the latest Jobs Report showed Wage Growth jumped last month. While this is great news for workers, it also gives the Fed more incentive to raise interest rates throughout the year. Remember the 222 Target – 2.0% Inflation, 2.0% Wage Growth, 2.0% GDP Growth – this will be a recurring theme throughout the year.

222 Fed Target

• Inflation: 2.1% CPI for the last 12 months
• Wage Growth: 2.9% for last 12 months
• GDP Growth: 1.9% for 2016 (more revisions to come)

Labor Markets

The next Jobs Report will be out tomorrow. The December Jobs Report results were lower than expected and had mixed results. Keep these numbers in mind when viewing Friday’s report.

• The Economy added 156,000 new jobs during December (175,000 expected) – pegging annual job creation at 2.2 million jobs for 2016. In 2015 the Economy added 2.7 million new jobs.
• The Unemployment Rate inched higher to 4.7% from 4.6% last month.
• The Average Wage earnings rose 0.5% in December pegging annual wage growth for 2016 at 2.9% – the best showing since the Financial Crisis. The Average Hourly Wage is now $26.00. This is good news for workers, but if wages start to accelerate too fast, the Fed will be inclined to raise interest rates more aggressively this year.

Inflation

Inflation is marching along at a faster pace. The CPI increased 2.1% during 2016 – that’s the highest it’s been in 2 years. What’s up and what’s down? The same story for the past few months – energy, health care, and housing (rent) – all the things you need are costing more. Energy prices alone were up 1.5% in just a month, while clothes and food were down. A strong dollar should help keep Inflation in check by making imports cheaper.

• CPI rose 0.3% in December (0.3% expected), up 2.1% in the last 12 months to a 2 year high
• Core CPI (ex-food & energy) rose 0.2% (0.2% expected), up 2.2% in the last 12 months
• PPI rose 0.3% (0.3% expected), up 1.6% in the last 12 months
• Core PPI (ex-food & energy) rose 0.2% (0.1% expected), up 1.6% in the last 12 months

GDP

The first guesstimate for 4th Quarter 2016 GDP showed the economy grew at a 1.9% annualized rate (2.2 % expected). The low reading disappointed Economists that were hoping for more robust growth. This number pegs 2016 GDP growth at 1.9% – below the Fed’s target of 2.0%. There will be several revisions (the first revision next month) before we know where 2016 GDP actually lands. Just remember that GDP is a notoriously hard number to pin down. That’s why each quarter has 3 revisions – it’s really a moving target so all the revisions are more like guesstimates.

Consumers

Consumers are feeling better about the economy. Retail Sales had a good yearend (not great but good) mostly due to car sales. However, not all retailers are feeling the love – Macys, Sears, and Kohls all had a terrible holiday season. You can blame some of it on Online Retailers or rising healthcare and housing costs. For some reason, Consumers just aren’t buying the goods these retailers.

• Retail sales rose 0.6% in December, (0.7% expected) mostly due to autos, and for the year Retail Sales rose 4.1%.
• The Consumer Sentiment Index rose to 98.5, up from 98.2 in December.
• Consumer Confidence fell to 111.8 (112.8 expected) – Consumers still feel optimistic about the Economy but are a little less confident about their jobs, wages, and business conditions.
• Consumer Spending rose 0.5% (.05% expected). Helped a little by higher gas prices.

International & Misc

• President Trump, as expected, withdrew from the Trans-Pacific Partnership.
• Sears sold its iconic Craftsman brand to Stanley Black & Decker. This sale may not seem like big news to Mortgage Professionals but to a former gear-head like myself who grew up fixing cars using Craftsman tools – this is big news.

Housing Data

The Housing Data released in January shows 2016 was the best year since 2007 for housing. The good year was bolstered by rising wages and low interest rates. But the supply of homes for sale remains tight with no sign of it improving anytime soon.

• Existing Home Sales (closed deals in December) fell 2.8% to an annual rate of 5,490,000 homes. The median home price for all types is now $232,200 – up 4.0% from a year ago. The median price for Single Family homes is $233,500 and $221,600 for condos. 1st Time Buyers were 32%, Investors 15%, Cash Buyers 21%. Homes are on the market an average of 53 days. Currently, 1,760,000 million homes are for sale.
• New Home Sales (signed contracts in December) fell 10.4% to a seasonally adjusted annual rate of 536,000 units. The median price of a new home is $322,500 and the average sales price is $384,000 – up 7.8% from a year ago. There are now 259,000 new homes for sale.
• Housing Starts (excavation began in December) rose 11.3% (9.0% expected) to a seasonally adjusted annual rate of 1,226,000 units. Single Family Housing Starts fell 4.0% to an annual pace of 795,000 units.
• Building Permits fell 0.2% – but Single Family permits rose 4.7% to an annual rate of 817,000 units. Multifamily Permits fell 8.3% which pulled the index down.
• Remember that New Home Sales, Housing Starts, and Building Permits, are notoriously volatile with a lot of statistical uncertainty from constant revisions and changes to the seasonal adjustment formula.
• FHFA Home Price Index rose 0.5% in November – home prices are now 6.1% higher than a year ago according to FHFA.
• S&P CoreLogic Case-Shiller Home Price Index – The 20 City Composite Index rose 5.3% year over year.
• Pending Home Sales Index (signed contracts in December) rose 1.6% to 109.0 from 107.3 in November.

This month’s Economic Calendar is attached as a PDF. You can view it on your computer, or print it out to post it in a visible spot so you won’t be surprised by interest rate changes due to the release of economic information. Click Here if you want a full 12 months of the 2017 Economic Calendar. You are welcome to share this with a friend or colleague. They can click here to sign up for the Monthly Calendar and Commentary.

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Questions or comments contact: Mark Paoletti

MPaoletti@MortgageElements.com

www.MortgageElements.com