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By Robert Johnson, CFA and Christine Benz | 06-23-2016 10:00 AM

Johnson: Home-Sales Data Encouraging Sign for GDP Growth

Housing and the consumer sector remain strong while many other areas are weak, says Morningstar's Bob Johnson.

Note to viewers: In place of Bob Johnson's regular column this week, we are posting this video filmed on Thursday.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Home sales are a key indicator of the health of the economy. Joining me to discuss some just-released housing-related data is Morningstar's director of economic analysis, Robert Johnson.

Bob, thank you so much for being here.

Bob Johnson: Great to be here today.

Benz: Bob, let's start by discussing existing home sales. You say you see a little bit of an improvement in the trend there.

Johnson: Absolutely. The month-to-month data showed about a 2% increase in existing home sales, so some improvement there. That group still looks pretty good year-over-year. Sales growth is about 5%. For the full year, we had been thinking the growth rate would be somewhere between 3% and 5%. So, we're kind of operating at the high end of that right now on a year-over-year basis and it's a little bit slower than in the last several years, but still not a bad performance.

Benz: So, when you dig into the numbers, one thing we've been hearing is that there's some weakness at the high end, that the lower end of the market seems to be the healthier part of the market. Is that what you saw in the data?

Johnson: Absolutely what we saw in the data. We look at average prices that homes sold at, and that was up about 3% year-over-year. And you say, "Oh, that's good." Now, what does that mean? Well, when you look at something like the Case-Shiller Index or any of the other big pricing indexes, which are based on the total market, not just what's sold, prices were up about 6%. What does that mean? Well, it means that people were more interested in the lower-priced homes in the market, and that brought the averages down. So, clearly, the interest has been higher on the low end and has been for some time and clearly, at the high end, I think, we've had some issues with the stock market that have clearly slowed what people are thinking and people have a little bit more choice at the high end. At the low end of the market, not so much. And certainly, it seems to be good news that we're seeing some spreading out to the low end of the market.

Benz: New home sales, another area of positivity you think?

Johnson: Yes, absolutely. We got the data on that also this week, and that certainly was a positive set of data. Again, recall that we had a really outstanding off-the-charts-type of number, double-digit, multidouble-digit number for the month of April and now we got the May data and we are down 5% sequentially. But don't let that worry you at all and we had a small revision for April as well. But when you look at the numbers on a year-over-year basis, we're kind of in that 9% to 11% growth rate for a full year. So, it's doing very well. That's the rate that we were anticipating for the full year and it's very consistent with the rates that we've seen for the past several months. So, we're very pleased with the new home sales data and it's also good because it drives a good part of the economy more than in existing home sales, where really all you recognize is kind of the broker commissions and you generate the remodeling sales and so forth, too. But to see the new home sales do well is something we've really been hoping for.

Benz: So that affects the basic materials sector and some other parts of the economy too. One number--and I know you keep an eye on an array of housing-related data points--one number you said looks good is the Architectural Billing Index. Let's talk about what that index is. Why do you think it's another gauge that investors should keep an eye on as they think about the health of the economy?

Johnson: Absolutely, and it's one that I've loved to watch and it's a great predictor and it actually has some potency about 11 months out. So, it's one of the more forward-looking indicators that we have and the overall reading was up over 53 this month. So that was great news. It had been in the lower 50s earlier in the year and kind of been trendless and right around 50-ish, and it's nice to see this big jump and the design contracts interest was also up. So, it looks likely that businesses are thinking about investing in real estate--in expanding--and so that's really, really great news to see that.

And the other part of that is, they do break it down by commercial and government and so forth, and particularly strong was the multifamily housing sector. And again, it's good to see because the multifamily housing sector had been eroding a little bit. Recall that it was really strong early in the recovery and we had this really strong boost from that as millennials stayed in apartments longer. So now we seem to have more interest in single-family homes and we had seen some slowing in the multifamily market which was worrisome to some, and now we've seen that actually through this Billing Index that maybe we've reached kind of the bottom in that multifamily slowdown. So, that's great news. Combine that with the single-family home data that we talked about earlier and housing seems to be in good shape.

Benz: And you said the retail area actually also looked somewhat positive through the lens of this Architectural Billing Index. Let's talk about that.

Johnson: Yeah. I mean, I think that we've seen a number of--where a lot of commercial-oriented businesses weren't expanding and we'd seen business investment data look a little weak. And certainly, we'll have to see if all these billings for architectural work, which always precedes a real building, actually turn into the actual building, but it looks like businesses are starting to invest again, whether it's office, retail space, it seems like there is a little bit more interest than there was.

Benz: So, taking a step back, you've gone through a lot of housing-related numbers. Big picture-wise, why do you care, why should we care so much about the health of the housing sector? What's its impact on the overall economy?

Johnson: Well, lately it's been extremely important, especially as we have relatively low GDP growth rates and it's been a key contributor. In fact, it's generally provided about 25% of our economic growth over the last few quarters and the consumer is the other sector that is doing very, very well and nothing else is. So, we really focused in on this real estate market because it is very critical. It provides a lot of jobs, a lot of growth and certainly, growth rates that we don't see in a lot of other sectors.

Benz: Last data point doesn't relate to housing but nonetheless something you keep an eye on: Initial unemployment claims. Let's talk about how they look this week.

Johnson: This week they got very near to the recovery low on a single-week basis and even on a four-week moving average basis, again also approaching the low levels we have reached back in March or so when they typically kind of are that low. So we were really glad to see those numbers back off. We were concerned along with Fed Chairman Yellen that the employment data was indicating a weaker economy and now we've seen a lot of contradictory data. The job openings and labor turnover, the Challenger Gray layoffs report, and now we've got initial claims all saying, you know, the employment market is just fine, thank you. So, that's very good news in terms of the actual employment and what that does for retail sales going forward. The bad news is it probably does put the Fed back looking at interest rates again at their next meeting.

Benz: Bob, always great to hear your insights. Thank you so much for being here today.

Johnson: Thank you.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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