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US: October new home sales point to modest boost to residential construction - Nomura

US new single-family home sales rose 6.2% m-o-m in October to an annualized pace of 685k, well above expectations (Nomura: -4.9% to 634k, Consensus: -7.4% to 627k) and up from the downwardly-revised 645k in September (previously reported as 667k), points out the research team at Nomura. 

Key Quotes

“Sales in the South region rose again in October by a modest 1.3% m-o-m, following a sharp 19.6% increase in September, likely reflecting the continued recovery from the recent hurricanes. Other regions increased robustly in October, contributing to an upside surprise in aggregate new home sales. Single-family homes for sale rose steadily, but supply at the current sales pace has inched down to 4.9 months in October, from 5.2 months in September, likely reflecting a pick-up in sales. Strong job creation and low mortgage costs have been supportive of healthy consumer demand. However, high demand and slow supply growth have exacerbated home affordability, which could hurt demand in the longer run.”

“The majority of new single-family houses sold in October have not been started, suggesting a modest boost to residential construction near term. This trend has continued since September, reflecting a sharp increase in demand for replacement homes following the recent hurricanes. Although housing construction remains constrained by supply factors such as a shortage of skilled labor, lack of developable lots, and rising building material costs, delayed housing projects in the areas affected by Hurricanes Harvey and Irma will likely contribute modestly to residential construction in Q4 as backlogged ground breaking takes place near term.”

“Beyond the near term, however, we remain conservative on residential investment. We expect spare capacity in the construction industry to remain limited and we maintain that higher prices due to supply constraints will continue to weigh on demand, making the pace of growth very gradual. Moreover, the multifamily housing market has been slowing with higher rental unit vacancy rates in large cities. We continue to expect multifamily housing starts to remain subdued considering continued high supply relative to demand.”

GDP tracking update: Stronger-than-expected October new home sales suggest brokers’ commissions, a sub-component of residential investment, may have been modestly greater than we anticipated. Further, we expect a modest boost to single-family residential construction in the near term as ground breaking for new homes sold takes place. Thus, we raised our Q4 real GDP tracking estimate by 0.1pp to 2.6% q-o-q saar.”

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