When Bad News is Good....

MARKET RECAP Who to Believe on This One? For the past year, if not more, we've been wishing, hoping, and even cheerleading for an upturn in economic growth. To this day, we have little to show for our emotional investment. Gross domestic product (GDP) grew at an imperceptible 0.1% rate on an annualized basis for the first-quarter of 2014. The advance fell far short of an already low-bar consensus estimate for 1.0% growth. Acceptable annual growth for a big country like ours is 3% or higher. Unless the economy picks up steam soon, we're unlikely to see 3% in 2014. Interestingly, the Federal Reserve's take on the economy doesn't quite jibe with the Bureau of Economic Analysis. (The BEA calculates GDP.) Fed officials see economic activity picking up, with employment improving and consumer spending gaining pace. The Fed is sufficiently convinced the economy is on the right track that it sees no reason to back off tapering. It will continue to reduce its monthly purchases of Treasury notes and bonds and mortgage-backed securities (MBS). Timing might account for the difference in opinion: The Fed is focused more on the latest economic data, while the BEA parses data all the way back to January. That said, the more contemporary data aren't terribly encouraging, particularly on housing investment. Many economists focus on consumer spending when estimating economic growth, but investment is just as important. Investment sets the stage for future consumption. Residential investment matters, because it has a rippling effect on the economy. It doesn't take much imagination to see the different materials and services required to build, sell, maintain, and furnish a home. Unfortunately, residential investment contracted during the first quarter, which marked a second-consecutive quarter of investment contraction. Because housing is such a large economic contributor, residential investment will need to turn positive for the economy to meaningfully grow. Mortgage activity, sluggish in recent months, also needs to pick up pace. We're not surprised that the surge of refinances that occurred in the past four years has been reduced to a trickle. Now that mortgage rates have stabilized within a tight range, there is less incentive to refinance. At this point, we'd like to see more purchase activity , which would obviously be of reflective higher sales volumes. On this front, activity continues to ebb and flow. Over the past two weeks, it has mostly ebbed. Nevertheless, we remain optimistic. The first signs of spring momentum have finally arrived. Pending home sales ended nine-straight months of declines with an encouraging 3.4% uptick in March. In another positive, February sales were revised upward by three-tenths to minus 0.5%. Home-price growth also appears to be moderating, which should help bring inventory and buyers into the market. Therefore, we expect pending home sales to rise over the next few months. If this occurs, we should expect to see a pick up in mortgage-purchase activity.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
International Trade (March)	Tues., May 6, 8:30 am, ET	$40.5 Billion (Deficit)	Moderately Important. International trade remains as subdued as domestic trade.
Mortgage Applications	Wed., May 7, 7:00 am, ET	None	Important. Purchase activity tumbled in the latest MBA report. This points to sluggish immediate sales activity.
Consumer Credit (March)	Wed., May 7, 3:00 pm, ET	$15 Billion (Increase)	Moderately Important. Revolving credit use has stagnated, which points to a moderating consumer-spending trend.
Job Openings (March)	Fri., May 9, 10:00 am, ET	4.2 Million	Important. Openings have trended higher in 2014, but the trend has been lead by lower-paying retail jobs.

 

Keeping you updated on the market for the week of May 5, 2014.

When Bad News is Good  Homeownership has hit a 19-year low, according to the Census Bureau. The share of Americans owning a home is down to 64.9%. Meanwhile, the median monthly asking rent has soared to a record high, hitting $766 as of the first quarter of 2014. Because our bread is buttered by homeownership, it would seem that ownership hitting a 19-year low is reason to lament, especially if we consider that many pundits believe the trend will be sustained. One prominent pundit, Sam Zell, chairman of apartment REIT Equity Residential, believes the homeownership rate will eventually fall to as low as 55%. We don't quite see it that way. For one, continually rising rents is good news for housing, especially if the rate of home-price appreciation continues to ease. This would mean that owning a home will make more sense economically to more people. The simple fact people prefer to own than to rent is also reason to be encouraged. People prefer to live in a neighborhood of owners, because these neighborhoods are usually more stable and better kept. The good news is that if you can satisfy your preference at a comparatively better price, you're more likely to act. We expect to see more people act as the advantages of ownership become more apparent. The U.S. homeownership rate peaked at 69.2% in June 2004. We don't see a return to that level in the near future, but something in the 65%-to-66% range is entirely reasonable and plausible.