Market Update for the week of July 7, 2014. "Trends We Want to See (Mostly)

MARKET RECAP Trends We Want to See (Mostly) Trends are frequently like starting a roll of new tape: Sometimes they are tough to get started, but once started, they tend to flow easily. For the past year, it's been tough getting a trend started in existing home sales. Just maybe one could be starting now. Existing home sales showed gains in April and May. The trend should extend into June. The Pending Home Sales Index rose a strong 6.1 percentage points in May. This is the largest gain since the housing-stimulus days of April 2010. Best of all, all regions posted gains. This points to stronger existing home sales in June, which seems likely based on our observations. More important, it appears sales momentum will extend into July. So, home sales are on the rise. Unfortunately, the rise isn't reflected in mortgage demand. Mortgage rates have remained low over the past couple weeks, but buyers haven't taken advantage of them. The Mortgage Bankers Association's application data show purchase activity fell 1% last week. For most of the past month, activity has been either down or flat. Obviously, we'd like to see more mortgage activity; not only for our own self interest, but for the good of the overall housing market. We've mentioned that a solid housing market is driven by owner-occupied buyers. Most of these buyers use a mortgage to finance their purchase. Young people – those without significant wealth – are most likely to use a mortgage. There's been a dearth of new, young buyers in the housing market. Slow economic growth and difficult job prospects are certainly culprits. There is another, perhaps more insidious, culprit – excessive student-loan debt. A recent article in The Hill reports that average student-loan debt for 71% of graduates who took out loans is $30,000. The NAR has found that 49% of Americans state that student loan debt is an obstacle to homeownership. Because they are not forming their own households, many young adults still live with their parents. A study produced by Deutsche Bank found that a third of 18-34 year olds live with mom and dad. Poor job prospects and student debt no doubt have contributed to the trend of so many people extending their adolescence. The upside is there is a lot of pent up demand. Deutsche Bank estimates that if households were to return to levels that prevailed in the early 2000s, more than four million new households could be formed. We are all aware there is plenty of slack in the system – low housing sales, low housing starts, low household formation, low mortgage usage – by historical standards. It's frustrating, to be sure, but the slack points to a low likelihood housing will backslide anytime soon. To the contrary, the slack points to sustainable all-around future growth.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (May)	Tues., July 8, 3:00 pm, ET	$15 Billion (Increase)	Important. Rising revolving credit use points to rising consumer confidence and rising economic growth.
Mortgage Applications	Wed., July 9, 7:00 am, ET	None	Important. Growth in purchase activity would provide more evidence that recent sales trends are sustainable.
Federal Reserve FOMC Meeting Minutes	Wed., July 9, 2:00 pm, ET	None	Moderately Important. The Fed will state what most of us know: the economy is improving, but not enough to alter the Fed's low-rate policies.

 

This is Exactly What We Want to See 288,000 new jobs were created in June, which dropped the unemployment rate to 6.1%. What's more, job gains in April and May were revised higher, with April jobs ratcheted up to 304,000 and May jobs increased to 224,000. Our economy has now benefited from five-consecutive months of 200,000+ new jobs. This is a trend we can all support. To maintain economic prosperity, 200,000-or-more new jobs need to be created each month. Given the strong gains we've seen in recent months, we expect the trend will continue, possibly through the end of the year. More jobs should lead to more household formation, and more housing and mortgage activity. As we note above, excessive student-loan debt remains a problem, but with more jobs available to young people, more of them should be able to service their debt and leave their parents' basements at the same time. One final note: Keep an eye on mortgage rates, with job growth picking up steam, the pressure for rates to trend higher will rise.