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HomeLet’s Look at Housing
Posted by Larry Doyle on August 21st, 2009 12:16 PM |
The National Association of Realtors just announced that existing home sales rose to the highest level in the last two years. This is obviously a good sign. What drove the increase and what is going on within the housing market broadly speaking? Can we assign a clean bill of health to the entire housing market based upon this report? Let’s dig deeper.
Bloomberg looks into this morning’s report and highlights the following in writing Existing Home Sales in U.S. Jump to Two Year High:
> Foreclosure-driven declines in prices, government credits for first-time buyers and near-record-low borrowing costs may keep stoking demand, helping the economy recover from the worst recession since the 1930s. Ongoing job losses are a reminder that more Americans will probably lose their homes, indicating a rebound will be slow to take hold.
Sense on Cents commentary: as I attested on August 11th in writing the “U.S. Mortgage/Housing Market has a Split Personality,” the economy has a decidedly different dynamic at work between lower priced homes which can be financed with conforming mortgages (ultimately purchased by Freddie Mac and Fannie Mae) and higher priced homes needing to be financed with Jumbo mortgages (not readily available by our friendly banks!!).
>Purchases of existing homes increased 5 percent compared with a year earlier. The median price dropped to $178,400 from the $210,100 in July 2008.
Sense on Cents commentary: do not look for price appreciation anytime soon. In fact, while home prices on the lower end may begin to stabilize on a relative basis, higher priced homes (those needing Jumbo financing) will remain under pressure.
> The number of previously-owned unsold homes on the market jumped 7.3 percent to 4.09 million in July, a “notable” increase, according to Lawrence Yun, the Realtors’ chief economist. At the current sales pace, it would take 9.4 months to sell those houses, the same as in June.
>About $3.4 trillion worth of houses are at risk of default because the owners owe more than the property is worth, Santa Ana, California-based First American CoreLogic said last week. By putting more homes on the market, foreclosures are keeping inventory higher than levels consistent with stable prices.
Sense on Cents commentary: the increase in unsold homes will keep prices under pressure which will help promote sales activity but will also serve to keep pressure on retail sales as consumers feel a negative wealth effect. Additionally, the supply of homes does not fully address the shadow inventory of homes held by banks but not yet put on the market. This shadow supply will likely increase given what is in the delinquency and foreclosure pipeline. (more…)
Risk Aversion Returns
Posted by Larry Doyle on July 8th, 2009 2:43 PM |
Risk aversion returns to the markets. Was the weakness in last week’s employment report so unexpected as to have investors running for the exits? Not in my opinion. I believe the equity markets got overdone to the upside and never truly belonged as high as they had gotten. The risk aversion is playing out in most, but not all, sectors of the market. Let’s review . . .
1. Equities: down .5-1% on the day and down 4% on the month. Concerns about 2nd quarter earnings along with prospects for future economic growth are weighing on stocks. See my post from earlier today about revised IMF projections for GDP.
2. U.S. Treasuries: a real flight to safety bid has reemerged in this sector. The $19 billion 10yr auction today was extremely well bid. The note was awarded at 3.365%, while it had been trading at 3.4% just prior to the bidding. The bid-to-cover ratio of 3.28 is extremely high.
On the month, the 10yr Treasury rate is lower by .20 (20 basis points) as is the 2yr note, as well.
3. Commodities: have largely tracked the equity markets lower with certain commodities, such as oil, declining even more. Oil on the month is down approximately 12%. There is increasing noise about further regulation within the oil markets, as the Wall Street Journal reports, Oil Speculators Under Fire.
4. Currencies: the greenback is sliding sharply versus the Japanese yen (currently 92.50) versus a closing level at the end of June at 96.30. The dollar is slightly stronger versus the Euro, but within levels seen over the last few months.
5. Bonds: while virtually every other sector of the market is flashing warning signals on the horizon, the credit sensitive sectors of the bond market seem remarkably calm. I would certainly not look to add exposure in the corporate bond or high yield sectors, and if I had exposure there I would lighten up. High yield bonds on the year are up approximately 25% and despite the selloff in equities from the early June highs, this sector has given back very little. Morgan Stanley concurs as Bloomberg reports, Junk Bonds Are ‘Dangerous’ After Rally, Peters Says:
The rally in junk bonds of the most debt-laden companies makes the market “incredibly dangerous,” said Greg Peters, head of credit strategy at Morgan Stanley.
“I just don’t see the proper risk reward here,” said Peters, who is based in New York. “The bet that you’re making in high yield right now is that the consensus forecast for defaults is actually going to come in lower than anticipated.”
Be careful out there!!
LD
Economic and Market Commentary July 14, 2009
Posted by Larry Doyle on July 14th, 2009 11:47 AM |
We have had a cross current of market moving news and developments this morning. Let’s navigate while bringing our own independent set of tools to cut through any excessive salesmanship or pandering on the part of market experts. Using Bloomberg as a conduit, they report Treasuries Fall as Rally in Global Stocks Damp Demand:
Bloomberg is better than this reporting. The reporters should more specifically highlight that across virtually every sector aside from gasoline and autos, retail sales declined. A rise in gasoline sales is simply a function of higher gasoline costs. That bit of news is not exactly a positive. Automobile sales are a long way from robust and are measured against prior month’s sales which had plunged.
I am not trying to be overly pessimistic, but merely looking for a full and honest analysis of the data. Moving right along, I strongly believe that Treasury rates increased (and thus Treasury prices declined) because of concerns about rising producer prices. As Bloomberg reports:
I also believe Treasury rates increased today on news that our annual federal deficit just crossed the $1 TRILLION level and is likely headed toward $2.0 TRILLION. No surprise why Secretary Geithner is in the Middle East for what amounts to a Wall Street roadshow in hopes that some of our largest creditors continue to finance our country.
On the earnings front, Bloomberg offers:
With all due respect to Mr. Di Galoma, America cares MUCH more about earnings in the heartland than merely the casino-style earnings generated by the inhabitants of 85 Broad Street in lower Manahttan, that being the home of Goldman Sachs. Earnings from Johnson and Johnson, CSX, Dell, Philips, Heartland, and Posco are decidedly mixed, and honestly generally weak.
Against those numbers, the fact that the equity market is merely unchanged on the day is a good performance.
In regard to upcoming earnings reports from our financial firms, please refer to my report this morning “How Will Banks ‘Manage’ Earnings?”
Bloomberg offers:
Put that $1.47 trillion figure in the context that the IMF projects TOTAL writedowns and credit losses at banks will be $4 trillion with $2.8 trillion of those here in the United States. To date, our banks have not taken half those writedowns and losses.
What do I see looking through all of this data and material? An increasing likelihood of a very sluggish economy with a whiff of inflation, otherwise known as stagflation!!
Remain defensive.
LD
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