Real Estate Index Points to Slowdown in January

This story was originally published in Builder.

The LegalShield Real Estate Index, a leading indicator of existing home sales, declined 0.2 points to 100.3 in January and is 2.7 percent below year-ago levels.

Recent movement in the Real Estate Index accurately predicted that November's surge in existing home sales would not be sustained, and its current reading suggests that home sales will remain subdued in the short term. Meanwhile, LegalShield's Consumer Financial Stress Index continues to suggest that the Conference Board's Consumer Confidence Index is overstated. Consumer financial health remains historically strong, however, as evidenced by solid consumer spending in the 4th quarter.

"Our data continues to indicate that consumers are right to feel good about their current financial situations and the overall economy in the first half of 2018, despite high consumer debt levels and a 12-year low in the personal savings rate," explained James Rosseau, LegalShield's chief commercial officer. "The LegalShield Law Index, which is based on requests for legal services from consumers and small businesses, continues to paint a positive picture of the economy."

The LegalShield Law Index comprises five indices, including the Real Estate Index, Consumer Financial Stress Index, Housing Activity Index, Bankruptcy Index, and the Foreclosure Index.

The LegalShield Consumer Financial Stress Index climbed (worsened) from 88.7 to 92.0 in January due to a significant increase in the estate planning component. However, LegalShield analysts suspect that the spike in demand for estate planning legal services is related to the recently-passed tax law and may be a temporary blip rather than an indication of increased financial stress. Meanwhile, the Conference Board's Consumer Confidence Index rose (improved) by 2.3 points in January, offsetting roughly half of its 5-plus point decline in December. The unusual divergence between the two indexes remains, and LegalShield data (along with other measures of confidence such as the University of Michigan's Consumer Sentiment Index, which is down 2.8 percent Y/Y) suggest that consumer confidence is likely overstated relative to economic fundamentals.

In January LegalShield's Housing Activity Index increased (improved) 1.8 points to 111.5, driven by a significant improvement (reduction) in the foreclosure component. The index has been largely flat over the past six months, reflecting a similar sideways movement in housing starts, which fell sharply in December but remain mostly unchanged from six months ago. However, residential investment grew 11.6 percent (SAAR) in the fourth quarter of 2017, the strongest quarterly growth in nearly two years.

"While we don't anticipate a huge rebound in housing construction activity in the near-term, there are signs that home builders are starting to overcome some of the headwinds they faced last year," Rosseau added. "The housing sector will be a key wild card to watch for the U.S. economy in 2018."

Additional predictive takeaways based on the data through January:

• The LegalShield Bankruptcy Index, a leading indicator of monthly bankruptcy filings, continues to suggest that bankruptcies will remain subdued in the near term. However, if the combination of student loan, auto loan, and credit card debt begin to drag on consumer financial health, bankruptcies may rise in the medium term.
• The LegalShield Foreclosure Index, an advance measure of foreclosure activity, suggests that foreclosures should remain subdued in the short term.

The five LegalShield indices closely track a handful of key economic indicators, such as the Consumer Confidence Index (developed by the Conference Board), Housing Starts (reported by the U.S. Census Bureau), and Foreclosure Starts (reported by the Mortgage Bankers Association). Each LegalShield index has undergone a battery of statistical tests to validate its relationship to an existing economic indicator that sheds light on the health and direction of the U.S. economy. LegalShield publishes the Law Index monthly, on the sixth business day of each month.