Strange Bedfellows: A Stronger Economy & Lower Yields

This week’s upbeat data on housing has inspired a new round of charges that the Federal Reserve “is clearly behind the curve.” Economist Scott Grannisproclaims: “Great news: the Fed is likely to raise rates sooner rather than later.” He explains that “nominal GDP has been growing at about a 4% pace for most of the past four years, yet the Fed has kept short-term rates extremely low. This is unsustainable.”

Housing has been a weak spot for the US economy in recent months, but the latest data suggests that a summer rebound is underway. Three new data points this week tell the story:

• Confidence among home builders this month rose to the highest level since January, according to the Housing Market Index (HMI) that’s published by the National Association of Home Builders (NAHB). “Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring,” notes David Crowe, NAHB’s chief economist. “Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand.”
• New residential housing construction posted a sharp upturn last month.Housing starts surged nearly 16% in August, increasing at the fastest pace in July since last November.
• Existing home sales climbed more than expected last month, rising to the highest annualized level so far this year, according to data published by the National Association of Realtors (NAR). “The number of houses for sale is higher than a year ago and tamer price increases are giving prospective buyers less hesitation about entering the market,” says  Lawrence Yun, NAR chief economist. “More people are buying homes compared to earlier in the year and this trend should continue with interest rates remaining low and apartment rents on the rise.”