Housing Market

it is suddenly not fun being a Fed president (or Chairmanwoman) these days: with yesterday's 2.1% CPI print, the YoY rate has now increased for four consecutive months and is above the Fed's target. Concurrently, the unemployment rate has also dipped well below the Fed’s previous 6.5% threshold guidance, in other words the Fed has now met both its mandates as set down previously. There have also been fairly unambiguous comments from the Fed’s Bullard suggesting that this is the closest the Fed has been to fulfilling its mandates in many years. Finally, adding to the "concerns" that the Fed may surprise everyone were BOE Carney’s comments last week that a hike “could happen sooner than the market currently expect." In short: continued QE here, without a taper acceleration, merely affirms that all the Fed is after is reflating the stock market, and such trivial considerations as employment and inflation are merely secondary to the Fed. Which, of course, we know - all is secondary to the wealth effect, i.e., making the rich, richer. But it is one thing for tinfoil hat sites to expose the truth, it is something else entirely when it is revealed to the entire world.

A month ago, using the latest UK housing data from Rightmove, we asked a simple question: whose housing bubble is bigger: China's, or the place where increasingly more of China's $25 trillion in bank assets are being parked: the UK (specifically London). Using then available data, the answer was still a toss-up, even if the divergence in directions was quite clear. Earlier today, we finally got the official data from the UK's Office for National Statistics, and we politely retract our question, as rhetorical as it may have been. The reason: there is no contest - the UK's housing bubble has officially slammed China's, and the result is nothing short of a knock out.

Disappasionate overview of what to expect from the 2-day FOMC meeting that begins today

Blame it on the... spring?

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• GM Says It Has a Shield From Some Liability (WSJ)
• BOJ’s Bond Paralysis Seen Spreading Across Markets (BBG)

It's one of those days: despite the Iraq conflict spilling out of control and about to involve US drones and warplanes, despite China's naval conflict with Vietnam over an oil rig in disputed territory set to go "kinetic" at any moment, despite the Ukraine civil war having its deadliest day yet this weekend and adding insult to injury Russia halting gas supplies to Ukraine (letting Kiev and Berlin fight for the scraps), despite crude prices rising ever higher and about to unleash a "discretionary income" shockwave on America's summertime motorists, despite yet another massive tax inversion M&A deal in which the buyer has made abundantly clear its stock is overvalued and will be used as the purchasing currency, stocks are inexplicably not at all time highs this morning.

Straightforward dispassionate overview of the investment climate

Those who have lost trust in Wall Street or actively hate it and everything it stands for (neofeudalism, unbridled greed, the corruption and collusion of the revolving door between the state and Wall Street, etc.) will never change their minds and hand their money to Wall Street to play with. If the primary assets held by Boomers (houses and stocks) both decline for these fundamental reasons, there may be relatively little wealth left to pass on to Gen-Y... if Gen-Y avoids bank debt/mortgages, buying conspicuous consumption luxury goods on credit and investing in Wall Street's scams and skims, this generational lack of demand for housing, stocks and luxury goods will effectively crash the sky-high valuations of these assets. These factors suggest a generational bet against banks, Wall Street, housing and luxury retail stocks.

"[W]e’re concerned about the retail demand environment, and a little less bullish than earlier in the year due to a slower housing market, some inconsistency at retail, and an economy that’s not quite as robust as expected," is how one CEO sums up Q2 so far and as Bloomberg's Rich Yamarone notes, the CEO Economic Sentiment Index remains mired at the lows of the year with no Q2 bounce whatsoever (despite hopes for all that pent-up demand). Retailers continue to complain of a highly promotional environment amid deteriorating traffic; and with the index at 49.1 (below the key 50 - expansion - level) it appears the hope of a Q2 bounce is a little premature.

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• Oil Rallies as Militant Advance in Iraq Threatens Crude (BBG)
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• Hedge Funds Get Stung by Slow Markets (WSJ)
• Sterling nears 5-year high after Carney speech (FT)
• Britain Warns Boom in Real-Estate Prices Threatens Economy (WSJ)
• East Europe Leaders Urge EU Unity to Counter Russia (BBG)
• Formula One Said to Be Valued at $8 Billion as Malone Seeks Stake (BBG)
• Dumb and dumber: Abe Plans Company Tax Cut in 2015 as Kuroda Warns on Budget (BBG)

As we showed a week ago, it is not just the coincident housing signals confirming that the latest artificial bounce has faded, but both upstream and downstream indicators. Specifically, we showed that lumber prices - that one component so critical in the building of new homes and a traditional leading indicator - have cratered. That's the upstream indicator. As for the downstream, we go to Bank of America which finds that not only has home improvement store spending declined substantially since the dead housing bounce peak last summer, but that furniture spending according to BofA estimates, is now once again negative: the first such drop since early 2012.

When looking at residential real estate, we often tend to focus almost solely on recent price movements in assessing the health of the housing market at any point in time. But as both homeowners and income-earners in the larger economy, of which the housing market is an important component, to really understand what's going on, we need clarity into the larger cycle driving those price movements. The more we look at today's data, the more it looks like that we are in a new type of pricing cycle -- one that homeowners and housing investors have no prior experience with. And the more we learn about the fundamentals underlying the current cycle, the harder it becomes to justify today's home prices on any sustained level. Meaning a downward reversion in home values is very probable in the coming years.

Two weeks ago we asked, rhetorically, "Whose Housing Bubble Is Bigger?" and showed the April home price increases in the UK and China.  Today, we have our answer. As the WSJ reports, "U.K. house prices rose at the fastest monthly pace in almost 12 years and to the highest level since before the global credit crisis in May, a survey showed Thursday, as demand for homes continues to outpace supply despite tougher new mortgage rules."

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• Nothing like objective, intense probes: GM recall probe to clear senior execs, finds no concerted coverup (Reuters)
• ECB ready to cut rates and push banks into lending to boost euro zone economy (Reuters)
• China Should Resist Further Stimulus, IMF Says (BBG)
• Carney Finds Ally in Draghi as Key Rate Kept at 0.5% (BBG)
• Assad wins Syria election with 88.7 percent of votes (Reuters)

According to a recent survey by the MacArthur foundation, during the past three years, over half of all U.S. adults (52%) have had to make at least one sacrifice in order to cover their rent or mortgage. Such sacrifices included getting an additional job, deferring saving for retirement, cutting back on health care and healthy foods, running up credit card debt, or moving to a less safe neighborhood or one with worse schools. More disturbingly, the survey also found that while there are some indicators that the American public’s views about the housing crisis are shifting toward the positive, large proportions of the public are not feeling the relief: seven in 10 (70%) believe we are still in the middle of the crisis or that the worst is yet to come.