Implications:  Despite December's weak headline number, new home sales in calendar 2016 were the highest since 2007.  Sales fell 10.4% in December and are now down 0.4% versus a year ago, illustrating the "fits and starts" recovery of the past several years.  Despite an increase of 10,000 in the inventory of unsold homes, this should not impede future home construction.  Most of this gain was due to an increase in the number of homes that have yet to begin construction.  Inventories still remain very low by historical standards (see chart to right), and builders are not keeping up with the demand for new homes. With only 5.8 months of supply, there is plenty of room to increase construction.  Going forward, we expect housing to remain a positive factor for the economy.  First, employment gains continue and wage growth is accelerating.  Second, the mortgage market is starting to thaw.  Third, the homeownership rate remains depressed as a larger share of the population is renting, leaving plenty of potential buyers as conditions continue to improve.  Unlike single-family homes which are counted in the new home sales data, multi-family homes (think condos in cities) are not counted.  So a shift back toward single family units will also serve to push reported sales higher.  Look for overall gains in home sales in the year ahead as these factors combine to drive expansion, and any headwind created by an increase in mortgage rates is offset by expectations of faster future economic growth.  In other recent housing news, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.5% in November and is up 6.1% in the past year, very close to the 6.2% gain in the year ending in November 2015.  On the employment front, initial unemployment claims jumped 22,000 last week to 259,000, most likely due to volatility from the Martin Luther King Day holiday weekend. Continuing claims rose 41,000 to 2.100 million. Despite the rise, these figures continue to suggest solid job growth in January.

Click here for PDF version