A Very Positive Sign on the Housing Front

Keeping you updated on the market! For the week of May 25, 2015

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MARKET RECAP A Very Positive Sign on the Housing Front We have a slightly different take on the world than most market commentators. Most commentators focus on consumption as the driving force behind the market. We focus more on production. To be sure, everything that is produced is produced to be consumed itself or to be used to produce something for final consumption. But consumption is always preceded by production. You have to produce before you can consume. For this reason, we put a little more weight on housing starts – production – than most. We were encouraged to see that housing starts blew past most economists' estimates in April. Specifically, starts rose to 1.135 million on an annualized rate. This is the highest monthly rate of starts in many years. More good news is found when you dig deeper into the data. The important single-family segment posted at 733,000 starts, 16.7% higher than in March. Permits, which portend future starts, rose 3.7%. We expect to see starts maintain this elevated level through the summer months. Granted, the surge in starts was partly attributable to downtime in March due to lousy weather. That said, the surge is more than weather driven. There is legitimate rising demand for new homes. This is reflected in home builder sentiment, which continues to maintain a 50-or-higher reading. The latest survey shows builder sentiment posted at 54 in May. Anything above 50 is positive. This is another reason we expect starts to maintain these elevated levels. A new home sale precedes an existing home sale. Existing home sales were disappointing, but not egregiously so. Sales were down 3.3% to 5.04 million on an annualized rate in April. Limited supply remains the bugaboo, particularly in the starter market. Young people still find it difficult to grasp the bottom rung. We remain confident, though, that entrepreneurial activity will eventually rectify this problem.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
New Home Sales (April)	Tues., May 26, 10:00 am ET	490,000 (Annualized)	Important. The pick up in starts points to stronger new home sales through the summer season.
Mortgage Applications	Wed., May 27, 7:00 am, ET	None	Important. Rising rates have taken some steam out of purchase activity, but activity should pick up when borrowers realize higher rates are the new normal.
Pending Home Sales Index (April)	Thurs., May 28, 10:00 am, ET	1.0% (Increase)	Important. The uptrend in contracts points to rising sales activity heading into summer.
Gross Domestic Product (1st Quarter 2015)	Fri., May 29, 8:30 am, ET	1.0% (Annualized Decrease)	Important. Contracting economic activity in the first quarter is one important reason the Fed will not move to raise interest rates.

 

Why the Fed Doesn't Really Matter at This Point Here we are in the waning days of May and it appears highly unlikely the Federal Reserve will move to raise the federal funds rate in June. At the beginning of the year, June was the month most everyone pointed to for the first increase in nearly 10 years. We were skeptical then, and we repeatedly stated our skepticism in subsequent months. Our skepticism was well founded. In the latest policy meeting minutes (from late April) officials said in the most explicit terms yet that they're unlikely to raise the fed funds rate in June. After watching the economy stumble through the winter, many at the meeting were doubtful the criteria for a rate increase would be met. The fed funds rate is supposed to have a cascade effect. Once it starts to rise, all other rates eventually rise too. But as we know, longer-term interest rates have been rising without prompting from the Fed. The yield on the 10-year U.S. Treasury note frequently posts above 2.25% these days. The rate on the 30-year fixed-rate mortgage loan is frequently quoted above 4%. We think investor sentiment has changed. Investors are no longer willing to buy bonds – Treasury bonds in particular – that offer a negative real yield (a yield that does not compensate for inflation). Though the yield on all bonds and notes in the U.S. is nominally positive, many fail to maintain purchasing power over time when inflation is factored in. Consider it this way: If you earn 1% on your savings and consumer price inflation is running at 2%. After a year, you're 1% in the hole. You've lost purchasing power. Investors have been willing to put up with negative real interest rates because the Fed was continually driving interest rates lower through quantitative easing. The Fed stopped quantitative easing in October (though it continues to reinvest the proceeds of maturing bonds into new bond purchases.) Investors know the Fed won't drive yields any lower. Last month, we warned that markets can change, and change in a hurry. That has certainly happened with the sharp rise in interest rates in general and mortgage rates in particular. Could we see 3.75% on the 30-year fixed-rate loan a month from now? Anything is possible, but what's possible isn't the same as what is probable. Article courtesy of Patti Wilson, American Momentum Bank.