June 2010 Market Information Archive
June 28, 2010
MARKET RECAP
The housing market is playing out close to what we had anticipated post-April 30, so we weren't surprised to hear that existing-home sales slipped in May, posting a 2.2 percent drop to an annualized adjusted rate of 5.66 million units. The consensus opinion called for sales to increase to 6.07 million units, due to an anticipated push to close by June 30, so the unexpected slip was disappointing. The good news was that the median sales price, at $179,600, remains 2.7 percent above last year's median price, while inventory tightened to an 8.3-month supply.
The slip in existing-home sales was nowhere near as disappointing as the tumble in new-home sales, which hit their lowest level since 1963. Whereas the consensus expected sales to post at an annualized rate of 470,000 units for May, the market was only able to deliver a 300,000-unit rate. To get a perspective on just how far new-home sales have dropped, only five years ago new homes were selling at a 1.39-million annualized rate. There was one notable positive in the new-home data – inventory tightened to an 8.5-month supply.
The disappointing data on home sales has rekindled talk of a double-dip recession. Many pundits were expecting existing-home sales to improve until July, after which the full impact of the tax-credit expirations would be felt. We've stated in past editions that we expect housing sales to behave similarly to automobile sales when they underwent a similar stimulus. In other words, we expect to see a precipitous sales drop (which we are seeing) followed by stabilizing and increasing sales.
Other market watchers are less sanguine. Employment worries have been the gut reaction to the lackluster demand for new homes. Construction will certainly suffer if fewer new homes are being built, so goes the extrapolative train of thought. Keep in mind, though, that renovations on foreclosures and short sales will pick up some of that slack. The more pressing issue, in our opinion, is draining the inventory of existing homes before building more new ones, which appears to be occurring. After all, when you want to drain a tub, you don't keep adding water.
Sales aren't the only housing-market variable hitting lows. Mortgage rates continue to hold, and at times exceed, historical lows, and could continue to do so into the near future. The Federal Reserve noted that inflation is “likely to be subdued for some time.” The Fed also said that “prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower.” But a few dissenting voices note that the low-rate pledge might fuel another asset-price bubble. Experience has taught us that dissenting voices are worth listening to.
Economic |
Release |
Consensus |
Analysis |
Personal Income & Outlays |
Mon, June 28, |
Income: 0.4% (Increase) |
Important. Spending is expected to ease on renewed economic concerns. |
S&P Case/Shiller Home Price Index |
Tues, June 29, |
3.4% |
Moderately Important. April's prices will likely be skewed by the push to exploit federal tax credits. |
Consumer Confidence |
Tues, June 29, |
62.9 Index |
Moderately Important. Confidence is easing, but remains healthy. |
Mortgage Applications |
Wed, June 30, |
None |
Important. Low rates alone are no longer stimulating lending activity. |
Construction Spending |
Thurs, July 1, |
0.5% |
Important. The drop in new-home construction will hurt overall spending. |
Pending Home Sales Index |
Thurs, July 1, |
99.8 Index |
Important. Sales will decline after the April surge. |
Employment Situation |
Fri, July 2, |
Unemployment Rate: 9.7% |
Very Important. Deviations from the consensus opinion will impact interest rates. |
The Costs are Outweighing the Benefits
We've stated that the benefits of low interest rates have run their course. We hold to our contrary opinion that low rates are actually hindering more than helping markets these days. Consider the mortgage market: Even though mortgage rates are dwelling in the basement, fewer people are applying for mortgages. The MBA reported that purchase activity declined 1.2 percent to the second-lowest level since 1997 last week, while refinancing activity slid 7.3 percent from its May 2009 highs.
The Federal Reserve's low-rate policy is hardly inspiring confidence. “Rates must be low because the economy is circling the drain,” so the man-on-the-street rationale goes. It's the wrong message to send, because promoting risk aversion also means promoting inertia. Risk-averse markets are simply less willing to engage in riskier, but worthwhile, economic activity.
This risk-averse sentiment is readily reflected in the capital markets, where the relatively non-productive assets of gold and Treasury securities continue to be the investments of choice. That's unfortunate, because we'd all be better off if there were more investment in the very productive (though riskier) assets of home purchases and renovation and mortgage lending.
June 14, 2010
Market Recap
The week was light on housing and mortgage data, which was a good thing; most of what was released offered little cheer. For instance, Capital Economics reported that 2.5 million households are going through the foreclosure process, while 5.4 million households have missed at least one mortgage payment. Capital Economics also expects another three million homes to be added to the foreclosure rolls by the end of 2011. In short, Capital Economics is calling for a housing-market double-dip.
Problems persist aside from the above mentioned, to be sure. According to more than a few sources, housing prices are under pressure. ZipRealty, for one, has noted that more than 43 percent of home sellers cut their home's list price in May, dropping the national median “for sale” price 2 percent to $265,000.
Of course, we can always question the usefulness of national data. But if we are going to talk nationally, it's worth broaching the positive as well. On that front, Integrated Asset Services reported that its house price index rose 0.9 percent in April from March. IAS also reported that three of the four US census regions showed home-pricing gains for the month.
The expiration of the federal homebuyer tax credits remains the elephant in the room, according to the commentariat, though it appears to be less of a concern for people who actually earn a living in the housing sector. Publicly traded homebuilders are seeing sales recover after an initial drop-off following April 30. A recent analyst's report from JMP Securities noted that sales at several homebuilder communities in California , Texas , and Phoenix – those notoriously hard-hit regions – have begun to improve and are approaching pre-April numbers. JMP's report also noted that many builders are raising prices and that higher-priced homes are moving briskly.
We noted in last week's edition that the housing market could easily follow the automobile market's lead, where sales initially drop after tax-credit expiration but then regain momentum. We've also noted – quite frequently in many past editions – that employment is the real cure to what ails us. Even though last week's employment report was tepidly received, we remain encouraged. Job openings jumped to the highest level in 16 months in April, with the number of jobs advertised rising to 3.1 million from 2.8 million. The fact that private employers accounted for the entire gain was a particularly encouraging sign.
An improving jobs outlook is good news for the economy, but less so for mortgage rates. Yes, rates continue to hold at historical lows (with improvements being marginal at best), but Federal Reserve rumblings on raising rates continue to build, which is why we continue to counsel against procrastination on a refinance or a home purchase. We also counsel that money is available: little, or negative, equity is not an exclusion to a favorable refinance. .
Economic |
Release |
Consensus |
Analysis |
Import Prices |
Tues, June 15, |
0.8% |
Important. The price trend remains non-inflationary. |
Housing Market Index |
Tues, June 15, |
22 Index |
Important. Homebuilder optimism continues to improve with the overall economy. |
Mortgage Applications |
Wed, June 16, |
None |
Important. Low rates appear to have reached a saturation point. |
Housing Starts |
Wed, June 16, |
650,000 (Annualized) |
Important. Markets are expecting a post tax-credit retreat, though activity appears stable. |
Industrial Production |
Wed, June 16, |
0.7% |
Important. Strong business demand is driving recent production increases. |
Consumer Price Index |
Thurs, June 17, |
All Goods: 0.1% (Decrease) |
Important. Consumer prices continue to show that inflation remains subdued. |
Leading Indicators| |
Thurs, June 17, |
0.2% |
Moderately Important. The indicators suggest the economic recovery remains on track. |
Another Round of Reasonable Perspective
There is no question that we face formidable, long-term structural problems – problems that have made US markets less attractive in recent years. But these problems are surmountable. We have no qualms saying that the spirit of innovation and entrepreneurship that has defined America in past crises will prevail today.
Though housing remains tepid and debt and deficit levels are rising, compared to the rest of the world the United States is in good shape. Our economic fundamentals are sound: manufacturing levels are up and interest rates and inflation are low. What's more, the broader economic recovery is translating into meaningful employment improvements and corporate-profit growth that could potentially reach a record high in this year's third quarter.
R isks clearly remain, but markets are always fraught with risks: there are no perfect markets. To the contrary, when markets seem the most perfect, that's when they are the most risky, as the housing and mortgage markets post-2006 have so painfully revealed. Things still aren't so rosy today, but that's okay, because we're sure that better days lie ahead.
June 7, 2010
Market Recap
Few housing market participants were surprised when the NAR reported that its pending home sales index increased again, 6 percent in April, to 110.9 (100 is the base set in 2001) thanks to a surge in sales contracts. April, not-so-coincidently, happened to mark the end of the extension of the federal homebuyer’s tax credits. NAR chief economist Lawrence Yun was upbeat on the new business, nonetheless, noting, “The homebuyer tax credit brought close to one million additional buyers into the market, which is now helping the trade-up market and has significantly improved the inventory situation."
We can't say with certainty whether Yun's analysis is correct. We've stated in past editions that tax credits bring buyers forward, but don't increase aggregate demand. Look no further than the automobile tax credits from last year. Once the $4,500 cash-for-clunkers purchase program ceased, sales dropped like a rock. Does that mean we should expect home sales to do the same?
We don't think so. Automobile sales have recovered, and have recovered quite nicely. In May, sales for General Motors increased 16.6 percent from the same year-ago period, while Ford's increased 23 percent. Not to be outdone by its larger competitors, Chrysler posted a 33 percent increase. What's more encouraging, the robust recovery in auto sales had nothing to do with tax credits; it had everything to do with an improving economy and improving consumer confidence.
These same factors will likely work favorably for the housing sector in coming months. In fact, they already are. Home prices climbed 6.8 percent in May 2010 from the same year-ago period, posting the largest yearly increase since July 2006, according to real estate data provider Clear Capital. Meanwhile, the number of REO properties on the market seems to be dropping. Clear Capital reports that the national REO saturation rate dropped to 27.8 percent, down from 41.7 percent last year.
We think this is a near-perfect market for homebuyers: home prices are low but stable, while mortgage rates continue to hug historical lows. In many parts of the country, buying a home is cheaper than renting.
But this scenario won't last indefinitely. More Federal Reserve Bank presidents (of which there are 12) believe the economy is sufficiently stable to begin raising interest rates. Kansas City Federal Reserve Bank President Thomas Hoening said that the US economic recovery has the momentum to sustain itself and called for an increase in the target federal funds rate to 1 percent by the end of summer. It's currently hovering near zero. Other Fed presidents have stated that they are “uncomfortable” with Federal Reserve Chairman Ben Bernanke's use of “extended period” as it is applied to low rates.
The bottom line is, when the Federal Reserve starts raising the federal funds rate – the influential rate at which banks lend to each other – mortgage rates won't be far behind.
Economic |
Release |
Consensus |
Analysis |
Consumer Credit |
Mon, June 7, |
$2 Billion| |
Moderately Important. Increasing credit use reflects greater consumer confidence. |
Mortgage Applications |
Wed, June 9, |
None |
Important. Lower rates have pushed refinances to a seven-month high. |
Federal Reserve Beige Book |
Wed, June 9, |
None |
Important. The market is expecting to see continued improvement in the economic outlook. |
International Trade |
Thurs, June 10, |
$41 Billion (Deficit) |
Moderately Important. The deficit is growing on a stronger dollar and greater domestic demand. |
Retail Sales |
Fri, June 11, |
0.2% |
Important. Retail sales continue to grow on stronger demand for durable goods. |
Consumer Sentiment |
Fri, June 11, |
74 Index |
Moderately Important. Despite the recent stock market drop and troubles in Europe , sentiment continues to improve. |
Business Inventories |
Fri, June 11, |
0.4% |
Moderately Important. Inventories are increasing with recent sales increases. |
Up, Up, But Not Quite Away
We were expecting a little more, but at least it's trending in the right direction. We are speaking of the employment report, which showed payrolls rose by 431,000 last month.
That would be very good news, if not for the fact that 411,000 of the new hires were related to the census. Nevertheless, that still leaves a net positive for the private sector. The increase was enough to push the unemployment rate down to 9.7 percent (though some pundits argue the drop was really due to a lower participation rate).
You never want to read too much into a single month of data, but we remain encouraged: job growth and wages picked up from April to May, while the average workweek lengthened. And although moderate compared to past post-recessions, the recovery is looking more sustainable after consumer spending and business investment rose at a healthy pace in the first quarter.
Overall, we think this latest employment report provides another reason to act now in both the mortgage and housing markets.