Economy Watch: Which Way is the Economy Going?

Will a fluctuating economy affect existing home prices?

By Dees Stribling, Contributing Editor

Which way is the economy going? The first quarter has been rightly judged to be sluggish indeed, with the second estimate of Q1 GDP growth being revised downward as expected by the Bureau of Economic Analysis on Friday. In fact, there was no growth during the quarter, but an annualized contraction of 0.7 percent. That was in contrast to growth of 2.2 percent in the fourth quarter of last year, and an initial estimate of meager growth during the first quarter of 0.2 percent.

All kinds of growth slowed during the first quarter: a drop in personal consumption expenditures—government talk for consumer spending—along with downturns in exports, in nonresidential fixed investment, and in state and local government spending, which have been growing since the end of the recession, but not consistently. Increases in private inventory investment (businesses buying things) and federal government spending weren’t enough to spur overall expansion. Of particular interest to the real estate industry were patterns in investment in nonresidential structures: these were down at an annualized 20.8 percent for the first quarter, compared with an increase of 5.9 percent in Q4. Residential fixed investment, on the other hand, increased 5 percent during Q1, compared with an increase of 3.8 percent during the quarter before.

There were other residential real estate positives reported this week as well. On Thursday, the National Association of Realtors said that its Pending Home Sales Index, which is based on deals inked but not closed, increased to 112.4 in April from 108.7 in March, and is now 14 percent above April 2014—the largest annual increase since September 2012. The index has increased year-over-year for eight consecutive months and is at its highest level since May 2006. It’s important that the index is a forward-looking indicator, in contrast to Q1 GDP, which is backward-looking. Will residential real estate help spur the economy to better growth in Q2? Could be.

The Realtors are further predicting that total existing-home sales in 2015 will be around 5.24 million units, an increase of 6.1 percent from 2014. Also, the national median existing-home price for all of this year is expected to increase around 6.7 percent. In 2014, existing-home sales declined 2.9 percent while prices rose 5.7 percent. The upshot of these housing numbers is that people do seem interested in buying houses again, and that’s good news for many sectors of the economy (including retailers and their landlords).

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