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MARKET TRENDS: Summary for the Week Beginning July 20, 2015

July 20, 2015

The week ahead will focus on housing data releases. The reports will include existing home sales on Wednesday, which are expected to have increased; however, new home sales on Friday are expected to have slowed.

The housing market has shown strength recently, with demand having stabilized and housing price gains moderated. Housing should remain an affordable option in the near term as mortgage rates are still below historical levels.

Any increase in the interest rates in the second half of the year should not have a major impact on housing demand, as mortgage rates would still remain reasonable. Lower mortgage rates and moderated home price gains impart confidence in home buyers, which further boost housing demand. Residential rental rates have also continued to move up, making home buying more attractive than renting.

Existing Home Sales (Wed): Existing home sales in June likely increased 0.9% to 5.4 million after a strong 5.1% rise to 5.35 million sales in May. Existing home sales grew 5.1% in May, their highest rate in nearly six years.

The housing market gained steam in the second quarter with an improving economy and employment levels, after a weak first quarter. Construction activities accelerated with home builders’ increasing confidence with a pickup in sales in the second quarter.

Housing data released recently indicates a healthy pace of growth. Home-builder sentiment is also upbeat. The National Association of Home Builders’ Housing Market Index rose five points to 59 in June, the highest reading since September 2014. Moreover, the U.S. construction spending touched its highest level in more than six years in April, gaining 2.2%.

CB Leading Index (Thurs): The Consumer Board Index likely increased 0.2% in June, down from the 0.7% rise in the previous month. The Conference Board Leading Index is a composite index based on 10 economic indicators, including employment, average manufacturing workweek, initial claims, permits for new housing construction, stock prices, and the yield curve which measures economic stability and predicts the future direction of the economy.

Manufacturing PMI (Fri): The market research firm, Markit, will report its preliminary U.S. Manufacturing Purchasing Managers’ Index on Friday. Manufacturing PMI likely rose to 53.7 in July from 53.6 in May. The June Index had missed the market expectations and was down from 54.0 in May.

The drop in headline Index was led by a fall in the Production Index to 53.9 in June from 55.2 in May. June production was at its lowest level since January 2014. Slower growth in total new business resulted in a weaker rise in production volumes.

In May, new order volumes grew at the slowest pace in the last 16 months. However, in June the Employment Index was at its highest since November 2014. A reading above 50.0 indicates expansion while below that is contraction.

New Home Sales (Fri): New Home Sales in June likely slowed down slightly by 0.1% month-over-month to 545,000 from 546,000 in May. New home sales in the U.S. rose 2.2% in May to the highest level in almost seven years.

The outlook for the second half of the year appears favorable as well with a higher number of jobs, a recovering economy and improving consumer confidence. This is reflected in the housing starts in June that climbed to the second-highest level since November 2007. Building permits, a gauge of future construction, rose to an almost eight-year high. Housing starts rose 9.8% to a 1.17 mn in June from an upwardly revised 1.07 million in May. However, increasing competitive pressure and rising land and construction cost, amid moderating home price increases, will be the headwinds to the growth in the housing market.

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