Oil Hits $100
Another effect of a long and cold winter is invariably the rising cost of energy. Energy bills get hit with a double whammy in a cold winter. First, homes use more energy for heating purposes because of the cold and because we are home more often and secondly the cost of the energy we use goes up because of higher demand. Thus after a nice respite with lower energy costs which helped the economy last year, we start this year with oil prices hitting a benchmark of $100 per barrel in the middle of February with natural gas prices rising as well. The next question is–will this hurt the economy?
When consumers spend more on energy costs, this leaves less discretionary income to spend elsewhere. So it is not surprising that we saw a weak report on retail sales released recently. We should also point out that more energy used by homes also increases economic output and this will factor in the first quarter numbers as well. However, it is the cold spurring higher energy prices–not stronger economic growth. The cold winter will end soon. This means that higher energy prices could be a temporary phenomenon.
Or, if the economy is bolstered by latent demand after the long and cold winter, these levels could be the new normal. Energy costs affect more than consumer spending — they affect consumer trends as well. For example, higher energy costs spur housing sales closer to the center of cities versus the far out suburbs. This is part of a trend that has been occurring over the past decade. Thus, the cost of oil and gas bears watching even when we are not at the pump enjoying the better weather ahead. Meanwhile we will see economic reports this week covering consumer confidence, personal income and spending, as well as pending and new home sales as we approach another wave of jobs data next week.
Even though new federal rules for home loans kicked in this year, and lenders’ standards remain high, Americans are increasingly likely to think it’s “easy” to get a home loan, according to a report released recently. Last month 52% of respondents to a survey from federally controlled mortgage buyer Fannie Mae said they thought it would be “easy” to get a home loan today. That share was a record-high for the series, which goes back to mid-2010. Fannie’s survey polls 1,000 American adults each month. January’s result should be good news for housing-market observers who have been concerned about the impact of new rules, along with rising rates, on demand. It seems that at least some would-be borrowers aren’t letting an evolving marketplace get them too down. Indeed, 70% of Fannie’s respondents said in January that they would buy a home if they were to move, matching a series high hit in October. While Fannie’s results may be a bit surprising, recent data from the Federal Reserve signaled that some large banks are easing standards for prime home mortgages. Source: Market Watch
Builders are expected to increase new-home production in 2014, but the sector continues to grapple with several challenges that could hinder its progress, economists said at the National Association of Home Builders International Builders’ Show this week in Las Vegas. “Consumers are back, pent-up demand is emerging, there is a growing need for new construction, distressed sales are diminishing, and builders see it,” says David Crowe, NAHB’s chief economist. However, builders continue to face rising costs for building materials, difficulties in obtaining appraisals that reflect builders’ prices, and limited availability in labor and developed lots, Crowe says. Borrowing costs will likely inch higher this year since rates are expected to climb as the Fed begins to taper its $85 billion per month bond-buying stimulus program. Still, “regarding rates, we’ve gone from dirt cheap to cheap, and I think we will see a gradual rise of about a half a percentage point to 5 percent in 2014,” says Frank Nothaft, Freddie Mac’s chief economist. Even then, he adds, “most markets will remain quite affordable.” New-home sales are averaging 8.7 percent of total home sales – just barely half the historical average of 16.1 percent, according to NAHB. Crowe projects 1.15 million total housing starts in 2014, up nearly 25 percent from the 2013 total of 928,000 units. Single-family production is expected to increase 32 percent in 2014 to 822,000 units, and then rise an additional 41 percent to 1.16 million units in 2015. Source: NAHB
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