Real estate and construction: Slowing growth in the housing market

Market Realist

Importance of the Fed’s Beige Book for fixed income investors (Part 5 of 11)

(Continued from Part 4)

The Fed’s Beige Book is published around two weeks ahead of its Federal Open Market Committee (or FOMC) meeting. The Beige Book contains information about how the various sectors have performed in the preceding six weeks commencing from the end of the previous FOMC meeting.

What does the real estate and construction sector update include?

The Beige Book report covers the real estate and construction sector as well. The real estate and construction update includes the information on residential and commercial real estate markets in the 12 reporting districts. This includes housing sales, new home construction, home inventories, commercial real estate activity, and home prices and rentals, among others.

What did the Fed’s Beige Book, issued in March, say about economic conditions in real estate and construction?

Almost all districts reported an improvement in the housing market although growth appeared to be slowing, attributing the slowdown to poor weather conditions. Most districts also reported lower home inventories. Home sales increased in Richmond, Atlanta, Chicago, St. Louis, and Dallas districts reported an increase in home sales, while sales were down in Philadelphia, Cleveland, Minneapolis, and Kansas City.

The sales trend appeared to be mixed in the Boston and New York districts. Districts reporting increases in new home construction included Richmond, Atlanta, Chicago, St. Louis, and Minneapolis. New home construction remained flat in Kansas City, and was down slightly from the previous period in Philadelphia. Rents increased above historical averages in Dallas, whereas rental trends in New York were mixed. Cleveland district expects healthy rental growth this year.

These indicators (higher sales, high prices, and lower home inventories) may indicate a spring surge in residential construction and companies like Toll Brothers (TOL), PulteGroup, Inc. (PHM), D.R. Horton (DHI), Beazer Homes (BZH), and Lennar (LEN) may increase construction activity to take advantage of the shortage.

Most districts indicated an optimistic outlook for non-residential construction activity. Philadelphia reported weather-related issues had affected non-residential construction activity and leases. New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco reported improved conditions and that commercial real estate activity had increased since the last report.

How does the Beige Book’s report of the real estate and construction sector impact debt investors?

An increase in business activity represented by real estate and construction would imply the economy is expanding and vice versa. Besides the economic impact generated of the real estate and construction activity themselves, these industries also generate multiplier effects on other industries. Other factors remaining constant, an increase in real estate and construction activity would mean the Fed would continue with its tapering of monthly asset purchases, which would reduce liquidity, raising interest rates on the bonds and causing bond prices to fall. The reverse would hold true for a decrease in real estate and construction-related activity.

Continue to Part 6

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