Are Things Really That Bad? Market Update for the week of June 30, 2014

MARKET RECAP Are Thing Really That Bad? This was a shocker: Gross Domestic Product (GDP) for the first quarter was revised down to a 2.9% contraction, meaning the economy shrunk 2.9% in the three months of 2014. Sounds rather distressing; a 2.9% contraction is the stuff of a serious recession. Should we be alarmed? Not necessarily, because we are looking in the review mirror. Markets are always forward looking processes. But if we do look to the past, we see a few mitigating factors. The weather was one. An unusually severe winter weighed heavily on consumption, investment, and trade. In other words, snow pretty much smothered the economy the first three months of the year. Looking forward, the second quarter is expected to show significant improvement. The economists at Merrill Lynch picture a rosy scenario. They expect the economy will have grown 4% for the quarter. What's more, they expect the economy to grow 3% for the remainder of the year. If Merrill's prediction holds, we can look forward to a robust second half. (Overall, though, 2014 won't appear so robust in hindsight. Averaging the four quarters will show the economy grew only 1.8% for the year.) Housing appears well positioned to lead a rebound. Existing home sales surged 4.9% higher in May to 4.89 million units on an annualized basis. When we factor in April's 1.5% gain, we get the first back-to-back gain in existing home sales since April and May of 2013. The jump in sales pushed the inventory down to 5.6 months in May from 5.7 months in April (based on the higher sales pace). Pricing remains strong, with the median price of an existing home increasing 5.9% to $213,400 in May (which moves more people into positive equity). A key takeaway is that the rise in the median price is the result of falling distressed sales. In May, only 11% of sales were attributed to distress properties compared to 18% a year ago. This suggests that the market is moving in the right direction. Speaking of the right direction, new-home sales surged 18.6% in May, rising to 504,000 units on an annualized rate. The South and the West lead the charge: The former saw a 14.2% monthly increase; the latter saw a whopping 34% increase. Best of all, home builders weren't discounting to move inventory. The median price of a new home increased 4.6% to $282,000. Though we didn't think the news on first-quarter GDP was distressing, it did impact mortgage rates. Across the country, rates moved lower this week. Bankrate.com's survey has the average rate on the 30-year fixed-rate loan pegged at 4.28%. Freddie Mac's survey has the average rate pegged at 4.14%. Both are roughly 30-basis points lower than where they were this time last year. The mortgage-rate trend has defied nearly all predictions (including our own). If you had asked market watchers on January 1 if the 30-year fixed-rate loan would be closer to 4% or 5% heading into July, the vast majority would have said closer to 5%. Lest we get too comfortable with today's low rates, let's keep an eye on the employment numbers that will be released this coming Thursday. Another month of 200,000-plus job gains could get rates moving higher.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales (May)	Mon., June 30, 10:00 am, ET	0.8% (Monthly Increase)	Important. The sales trend is expected to improve through the summer and fall months.
Construction Spending (May)	Tues., July 1, 10:00 am, ET	0.5% (Increase)	Important. Builder sentiment and improving home sales point to higher residential construction spending.
Mortgage Applications	Wed., July 2, 7:00 am, ET	None	Important. Purchase activity must improve to sustain long-term sales growth.
Employment Situation (June)	Thurs., July 3, 8:30 am, ET	Unemployment Rate: 6.3% Payrolls: 220,000 (Increase)	Very Important. Continual 200,000-plus payroll gains will eventually pressure interest rates to rise.

 

A Possible Fly in the Ointment Low mortgage-purchase activity is one of our frequent laments. Activity simply refuses to gain traction. The latest data from the Mortgage Bankers Association once again show another weekly decline – 1% – in the purchase index. To return to full normalcy, the residential real estate market must be dominated by owner-occupiers. These buyers by far rely on mortgage financing to secure their purchase. With purchase activity low, the housing market is still relying on cash buyers, which to a large degree comprises institutions and people trading up. High mortgage activity would be indicative of more organic growth.