Monday, September 29, 2014

A Mixed Bag, But It's One We'll Take.

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September 29, 2014

A Mixed Bag, But It's One We'll Take
Is it two steps forward, one step back; or one step forward, one step back? Sometimes it's difficult to tell.
When it comes to existing home sales, one step forward, one-and-a-half steps back might be the better descriptor. Sales of existing homes drifted down 1.8%, to 5.05 million units, on an annualized basis in August. Year over year, sales are down 5.3%. Supply has again been fingered as the culprit for the sales-volume dearth. Supply for the month fell by 40,000 units, which drops total inventory to 2.31 million units.
The good news is that pricing continues to reflect reality. Existing-home prices have been relatively flat for the past six months. Year over year, the median price of an existing home is up 4.8% to $219,800. This is no surprise. We've seen price appreciation moderate through most of 2014. We expect that trend to continue into 2015.
When we vet new-home sales, the trend is definitely two steps forward, one step back. New home sales surged 18%, to 504,000 units, on an annualized basis in August. Pricing appears to be more favorable to buyers. The median price of a new home dropped 1.6% for the month to $275,600. Year over year, the median price is up 8%, but that rate of increase is slowing and will likely continue to do so. At the current sales pace, inventory has dropped to 4.6 months. This points to home-builder activity picking up through the end of the year. That's good news for the overall economy.
There's more good news specific to housing.
CoreLogic reports that nearly 950,000 homes were lifted into positive equity in the second quarter of 2014. Nationwide, home equity has increased by $1 trillion year over year. To be sure, we still have more room to improve. CoreLogic estimates that approximately 5.3 million homes, or 10.7% of all residential properties with a mortgage, were still in negative equity as of the second quarter. But that's a significant improvement over the 7.2 million homes in negative equity a year ago. We expect the equity trend to remain positive deep into 2015.
We see more positive news in a recent survey conducted by The Demand Institute, a nonprofit think tank. Demand's survey reveals what we've known all along: Millennials might be transforming the workplace, but at home they are very much like their parents and grandparents. They want to get married and have a family, and many of them want to raise that family in the suburbs – the domain of the single-family home.
We never bought into the notion that the United States is becoming a nation of renters. Many surveys we've read over the past year have confirmed our bias. The Demand Institute's survey is simply another arrow for our quiver.


Date and Time
Consumer Confidence Index
Tues., Sept. 30,
10:00 am, ET
93.8 Index
Moderately Important. Rising confidence bodes well for housing and other big-ticket items.
Mortgage Applications
Wed., Oct. 1,
7:00 am, ET
Important. Purchase activity could be hurt by rising rates, but so far economic growth is countering the rise.
Construction Spending
Wed., Oct. 1,
10:00 am, ET
0.1% (Increase)
Important. Residential construction continues to pace gains.
Employment Situation
Fri., Oct. 3,
8:30 am, ET
Unemployment Rate: 6.1%
Payrolls: 218,000 (Increase)
Very Important. After a disappointing August, job growth is expected to pick up pace, which could lead to rising interest rates.


Making Sense of Interest Rates
Interest rates are confounding to predict. Of course, the Federal Reserve is a lead influence, which is why market participants spend so much time parsing its every word. That said, most of the Fed's influence is focused on the short-end of the yield curve. By way of extrapolation, market participants then estimate longer yields. For example, if the current one-year yield is 1% and the market believes the Fed will lift that yield to 2% next year, the 2-year yield today should be 1.5% (1% plus 2% divided by two).
If life were only so straightforward. It's not. Money supply, wealth position, and expected inflation also play important roles. If the money supply increases and wealth and inflation expectations remain the same, interest rates should fall. With everything else held constant, more money can be allocated to financial assets, thus raising their prices and lowering their yields. On the flip-side, if money supply decreases and wealth and inflation expectations remain the same, interest rates should rise. With everything else held constant, less money means less money flowing into capital markets. Financial asset prices fall and yields rise.
So where does this leave us? We think wealth will at least remain constant. Inflation will likely remain muted. As for the money supply, it will likely decrease beginning next year due to the Fed withdrawing from quantitative easing and raising short-term rates. Based on this outlook, interest rates should rise in 2015.
Admittedly, we've been down this road before. We thought this scenario would play out this year. It hasn't, but it has to one day.
Article courtesy of Patti Wilson, American Momentum Bank.

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