Implications: Look out above! New home sales boomed in July, easily crushing the most optimistic forecast from any economics group. Sales rose 12.4% for the month to the fastest pace since 2007 and are now up 31.3% versus a year ago. If anything, builders are falling behind the demand for new homes. The inventory of unsold homes fell 7,000 in July and remains very low by historical standards (see chart to right). The months' supply of homes (how long it would take to sell the entire inventory of homes) fell to only 4.3 in July. To put this in perspective, that's lower than the average for any calendar year since 2004. This means homebuilders still have plenty of room to increase both construction and inventories. It's important to remember that home sales data are very volatile from month to month, so let's not get too carried away, but we think there are a few reasons to 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. Even though the median sales price of a new home is now down 0.5% from last year, this is likely due to a shift in the "mix" of homes sold, as other measures of home prices show continued gains. On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory sentiment fell to -11 in August from +10 in July, signaling that activity in the factory sector will continue to be volatile. That's what we should expect in a Plow Horse Economy.
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