Housing Market

You would think that with all the surefire bets in housing that people would be dialing up their realtors and heading out every weekend to make those lustful multiple offers presented in PowerPoint format on properties. Yet the overall market data shows a different story. The house horniest of them all, investors, are clearly pulling out of markets including sunny and inflated California. Apparently home prices do matter when making investment decisions. Cash strapped hormonal buyers will keep on buying but housing prices are set on the margin. That margin is becoming razor thin on current volume. I find it interesting that the biggest housing supporter of them all, the National Association of Realtors is also somewhat tepid on this recovery. Why? Because home sales volume is pathetic. Keep in mind they make money on selling and buying. Volume is key. Their model doesn’t work so well with banks holding onto properties like Gollum holding onto the ring and the foreclosure process being dragged out like the forever college student enjoying year 10 at Santa Monica City College. You see this overarching trend occurring in many metro areas across the country. Investors have been propping up the market since 2008. They are now slowly pulling back. You are also starting to see a convergence of analysts putting out their predictions on how overvalued housing is and backing it up with mountains of data. The other side of the argument points to prices. Sure, they’ve gone up but value is created by actual price and that is sort of the point. The answer as always isn’t so simple but using your thinking cap it is important to understand that housing is not a “no brainer” decision in this market.

Regardless of which side of the low labor force participation rate argument you stand on, it is hard to argue that it is simply a function of retiring "baby boomers." While political arguments are great for debate, it is the economics that ultimately drive employment. While the Fed has inflated asset prices to the satisfaction of Wall Street, it has done little for the middle class. It is ultimately fiscal policy that will help business create employment, the problem is that businesses need less of it while government officials keep piling on more. In the meantime, stop blaming "baby boomers" for not retiring - they simply can't afford to.

Yesterday we mocked China for being desperate enough to push its tumbling housing market (which directly and indirectly accounts for some 80% of Chinese GDP per SocGen estimates) no matter the cost, that at least 20 developers were offering the kinds of mortgages that resulted in the first credit bubble crack up boom and collapse, namely "Zero money down." Little did we know that the US, never one to lag in the financial innovation department had once again one-upped China, by bringing back from the dead the company that according to Housing Wire was "once a poster child for pre-crash subprime lending" - Ditech Mortgage Corp.  But best of all, ditech was known as a leader in subprime. The bulk of the mortgages were interest-only, low-documentation subprimes, and ditech was a pioneer in offering 125% loans allowing the borrower to borrow more than the sale price.

In this brave new centrally-planned world, where bad is good, very bad is very good, and everything is weather adjusted, Japan's blistering GDP report last night, printing at 5.9% on expectations of 4.3% was "bad" because it means less possibility for a boost in QE pushing futures lower, while the liquidity addicts were giddy with the GDP miss in Europe where everyone except Germany missed (as for the German beat, Goldman's crack theam of economic climatologists, said it was due to the weather), and the Eurozone as a whole came at 0.2%, half the forecast 0.4%, which in turn allowed futures to regain some of the lost ground.

"...Since March, 20 property developers in Guangzhou have been offering "zero down-­payments" to attract buyers, in addition to large discounts and tax refund, the National Business Daily reported Monday."

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"New starts contracted 15% yoy (vs. -21.9% yoy in March); property sales fell 14.3% yoy (vs. -7.5% yoy); and land sales (by area) plunged 20.5% yoy (vs. -16.9% yoy previously). ... the housing market situation has undoubtedly turned quite gloomy. There has been a constant news stream of falling property prices everywhere, even in the 1-tier cities. A number of local governments, as we expected, have started to ease policy locally, especially relaxation of the home-purchase restrictions." - Soc Gen

Cruising through earnings, it is now time to revisit certain indicators that speak to the underlying health of the economy and that of the US equity and Treasury bond market.

There's not much good news for housing these days. For a little while, the Fed's suppression of interest rates juiced housing enough to distract Americans from weak job creation and stagnant real wages. Don't have a job? No problem! Just borrow against the appreciation of your house to feed your family. But Yellen's interest rate wand looks to be out of magic. The government had a pipe dream of white picket fences for everyone. But Americans can't refinance their way to wealth. Especially in the Greater Depression.

This week markets are likely to focus on a few important data prints in DMs, including Philly Fed in the US (expect solid expansionary territory) and 1Q GDP releases in the Euro area (with upside risks). In DMs, the highlights of the week include [on Monday] Japan’s trade balance data and Australia business conditions; [on Tuesday] US retail sales, CPI in Italy and Sweden; [on Wednesday] US PPI, Euro area IP, CPI in France, Germany and Spain; [on Thursday] US Philly Fed, CPI, capacity utilization, Euro area and Japan GDP; and [on Friday] US Univ. of Michigan Confidence. In the US, we expect Philly Fed to print in solidly expansionary territory (at 14, similar to consensus) and to inaugurate what we call the active data period of the month. We also expect CPI inflation to print at 0.3% mom (similar to consensus), and core CPI inflation at 0.18% mom (slightly above consensus).

Dispassionate discussion of the near-term forces at work in the foreign exchange market.  

What is happening in the luxury US housing segment has spilled over beyond the simply bizarre and has now openly entered surreal territory...

Goldman, it would appear, are desperate to not be forced to admit they are wrong once again. On the heels of their dramatic and humiliating swing from expectations of a +3.0% Q1 GDP growth rate at the start of the year to a current -0.6% expectation, the hockey-stick-believers are out with their latest piece of guesswork explaining how growth will explode to 3.9% in Q2 (a full percentage point higher than their previous estimate).The platform for this v-shaped recovery - "consumer spending will probably grow strongly, while the housing market should gradually improve." So 'probably' and 'should' it is then.

Confirming and continuing a trend we first described a year ago, overnight RealtyTrac reported, as part of its Q1 institutional investor and cash sales report, that the percentage of all-cash buyers has soared in the past year with "42.7% of all U.S. residential property sales in the first quarter were all-cash purchases, up from 37.8% in the previous quarter and up from 19.1% in the first quarter of 2013 to the highest level since RealtyTrac began tracking all-cash purchases in the first quarter of 2011."

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