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[Tor]

Overall, housing starts and initial claims (290K) data suggests activity is strengthening and the labor market tightening further, but with core inflation pressure OK, with the moderation trend still in place as core CPI 3-month annualized is 1.4% and 6 month annualized is 2.0%. Housing starts rose for the second consecutive month to a higher than expected 1.642M (consensus 1.57M, HSBC 1.52M). More meaningfully, the less volatile building permits rose for the first time in eleven months (since January 2006), to a stronger than expected 1.596M (consensus 1.505M, HSBC 1.5M). This is fuel for those saying housing has bottomed, and is consistent with the recent rise in homebuilder optimism too. Still, it will take a bit longer for residential construction to rise in the GDP accounts, but if these trends continue, it may set up a stabilization/small rise by Q2 or Q3, and represents an upside risk to our view that home-building will continue detracting from growth in H2. Still, it's way to early to throw the towel in on this view yet, given inventories remain high, and in our opinion, high housing valuations will continue to constrain sales, and hence activity, going forward. On a y-o-y basis, starts are still down 18% and permits down 24%. Dec core CPI rose +0.2% (+0.193%), matching expectations (consensus and HSBC +0.2%). The year-on-year rate remained at 2.6%. The headline CPI rose 0.5% (consensus and HSBC +0.4%), boosted by higher gasoline prices (+6.4%). The OER rose +0.29%. Excluding OER, the core CPI rose +0.15%. But auto prices continued to slide, with further declines in new autos (-0.2%) and used autos (-0.8%). The core CPI ex-autos was +0.25%. Excluding both OER and autos, the core CPI rose +0.22% on the month and is running at 2.3% year-on-year.

[pdx5]

The main reason house prices are stagnating is the affordability index. Once the speculators and flippers are scared off, the sellers outnumber the buyers regardless of how low the interest rates fall. That is because the mortgage payments are also dependent on the price of house, not just interest rate. So, until the affordability index catches up to its norm, housing will be in contraction mode.