Does This Feel Like a Recovery?

Keeping you updated on the market! For the week of February 9, 2015

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MARKET RECAP Does This Feel Like a Recovery? Over the past month, we've spent an inordinate amount of time on the Federal Reserve. We think for good reason. Most everyone in financial circles is openly wondering when the Fed will raise the influential federal funds rate. In other words, all of us are wondering when interest rates will rise. When interest rates rise, financing obviously becomes more expensive. But rising interest rates are also indicative of a stronger economy. The Fed raises rates because it believes businesses can withstand higher financing costs. Yet here we are five years after the nadir of the 2008-2009 recession and interest rates continue to hold post-recession lows. By now, you would think they would have moved higher. After all, the Fed initially pointed to a 6.5% unemployment rate as a guidepost to begin raising rates. We long ago blasted past 6.5%. Unemployment is down to 5.6%. There are a few mitigating factors at work. U.S. interest rates are generally higher than those in Europe and Japan. At the same time, the dollar has appreciated strongly against most currencies. Raising interest rates would further strengthen the dollar. A stronger dollar, in turn, makes U.S. exports more expensive (though imports and foreign travel are cheaper). What's more, It's possible the economy simply isn't as strong as the numbers suggest. Consumer-price inflation remains muted and below the Fed's 2% annual growth target. When the economy heats up, so does consumer spending, and so does consumer-price inflation. That hasn't occurred. Housing, in particular, doesn't feel as strong as we'd expect it to feel this deep into a recovery. Last week, we mentioned that we see a split in the housing market (at least nationally). New homes sales continue to move forward, but existing home sales continue to lag. Unfortunately, it doesn't appear existing homes sales will move meaningfully forward any time soon. The latest reading on pending home sales points to at least another month or two of sluggish sales growth. We've seen a resurgence in mortgage refinancing activity, which is good. That said, we'd like to see more purchase activity. Of course, more purchase activity is indicative of more home sales – both new and existing. The good news is that the reduction in MIP fees on FHA loans is lifting FHA demand. Conventional demand, on the other hand, remains flat, but it's worth mentioning that underwriting standards have become more accommodating over the past 12 months. Don't misunderstand. We're still up for housing (as we'll explain in further detail below), but it just feels like housing should be up more than it is.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Feb. 11, 7:00 am, ET	None	Important. Refinances have taken the lead. Purchases have again backslid, which points to muted near-term sales growth.
Retail Sales (January)	Thurs., Feb. 12, 8:30 am, ET	0.7% (Decrease)	Moderately Important. A fall off in retail sales is a normal consumer reaction to the holiday spending binge.
Import Prices (January)	Fri., Feb. 13, 8:30 am, ET	3.5% (Decrease)	Moderately Important. Falling import prices ensure inflation risk remains nonexistent.
Consumer Sentiment (February)	Fri., Feb. 13, 9:55 am, ET	98 Index	Moderately Important. Consumer sentiment remains high, but has yet to lift demand for big-ticket items.

 

Full Steam Ahead Though it might not feel like a full-blown recovery now, it should feel like one by the end of the year. Heading into this year, we presented our case for why we thought housing would breakout in 2015. A couple high-profile financial institutions have stepped forward this week to support our contention. Goldman Sachs recently reached out to its clients to inform them that housing looks strong. Goldman sited a pick up in housing formation, which has lagged in recent years, for its bullish outlook. With improving job prospects, more millennials will move of their parent's home, so Goldman reasons. At the same time, access to easier credit will enable them to buy their own home. There is still a dearth of first-time buyers in this market and Goldman expects millennials to fill the void. Fannie Mae is also aboard the housing bandwagon. Like Goldman, Fannie points to a millennial uplift. What's more, Fannie is counting on new construction to meet rising demand from millennials and other buyers. Fannie expects starts to average 1.15 millions units on an annualized basis this year. It expects that number to ramp up to 1.5 million to 1.6 million units per year by 2017. From our perspective, the high number of renters in this market is pent up buyer demand. Since the end of 2007, the number of homes occupied by renters is estimated to have increased by four million. We already know that homeownership is at a multi-decade low. We also know renting is frequently the gateway to buying. Once someone has lived on his own, he frequently wants to buy a place of his own. So, yes, we remain up for housing. We just think we'll feel a little more up by year's end. Article Courtesy of Patti Wilson, American Momentum Bank.