U.S. stocks rallied on Friday as existing home sales rose for a fourth-straight month and Fed Chairman Bernanke stated “fears of financial collapse have receded substantially.” The move in equity prices pushed the broad market higher by 2.20% for the week. The S&P 500 has jumped nearly 17% over the past six weeks.
Friday’s housing data pushed existing home sales higher by 5% from the year-ago period, the first year-over-year gain since November 2005. One wonders what happens to housing again when the tax credit for first-time homebuyers expires in December and interest rates begin even a mild rise, but the market isn’t interested in such thoughts right now.
On the Bernanke comments, I can’t say it surprises me to see traders push stocks higher on his comments, but the move, if it was actually on those comments, doesn’t make much sense as the preponderant reason for most of the surge from the depths in March is because the “Armageddon” scenario has been removed – the market has already priced in this assumption.
This massive rally since the March 9 low has pushed to 54% now. Back in early March just five of the S&P 500 members traded above their 200-day moving average. In a matter of just six months, 457 of the 500 members now trade above their 200-day, according to David Singer. The entire index trades 18% above its 200-day MA, which is double its premium when stocks hit their all-time highs back in the summer of 2007.
Market Activity for August 21, 2009
Existing Home Sales
The National Association of Realtors (NAR) reported that existing home sales jumped 7.2% in July to 5.24 million units at an annual rate. When we separate single-family units from the data, sales were up 6.5% to 4.6 million units at an annual pace – this marks the fourth-straight month of increase off of the 12-year low.
The median price for an existing home fell 2% in July to $178,400 and is down 15% from a year ago -- still ugly, but up from the cycle low of 17.5% in January.
As a result of the sales pick up, the inventory of existing-home supply relative to sales fell to 8.6 months worth of supply, from 8.9 in June. The move from extreme elevation at the end of last year is very welcome, but the current level remains heightened – a number below seven months of supply is consistent with price stability, according to NAR.
This is all good news, but the stock market is pricing in too much optimism in my view. Homes sales are being driven by foreclosure-related price declines (31% of July sales were from foreclosed or distressed properties), tax credits for first-time buyers and mortgage rates that are being artificially held low by the Fed’s mortgage-backed purchases.
Certainly, there is nothing wrong with the sales from the foreclosure-driven price declines; this is the market at work. But the tax credits will expire in three months and the Fed cannot keep buying mortgage securities (pushing the prices higher and the yields lower) for long, at some point this quantitative easing must be reversed. It will be a while (maybe the end of 2010) before this reversal occurs, but I don’t think the labor market will have healed by then and just as their current action has pushed rates lower, the bounce back will be more pronounced as result of these decisions.
The question remains, what happens to home sales at that point? The market will be completely dependent upon labor-market conditions when these programs run out. I think this is something the market needs to begin thinking about.
Mortgage-Security Problems Persist
We put up a chart of mortgage delinquencies on Friday. That picture illustrated that 9.24% of the mortgage market is at least 30-days delinquent, up from 6.24% a year ago and the 30-year average of 4.97%. When you add in loans that are currently in the foreclosure process that number rises to 13.16%, the highest level ever recorded by the Mortgage Bankers Association – this gauge does not go back to the Great Depression, a period in which these figures were much worse.
I found the chart below also interesting. It shows the potential for pent up foreclosures, a situation at least partially due to states placing moratoriums on the foreclosure process. The rest is due to the damage seen within the labor market, exacerbated by too many homebuyers purchasing more home than they could truly afford.
I bring this to your attention after the WSJ ran a story on Friday explaining that banks (and they were talking about smaller banks) have a lot of bad securities in their trading accounts – mortgage-security pools (some with 40% delinquency rates). These positions will have to be written down and will consume some institutions’ entire capital positions.
This is worrisome, but there is one clear way to remedy the situation. We need default rates to substantially slow and real estate prices to rise -- a mild increase is all that is needed. For this we need a burgeoning economy, which will not occur under the current policy path. Instead, we must slash tax rates on labor income, dividends, corporate profits and capital returns; passing all free trade pacts that are currently being blocked by Congress would also be a huge plus. In addition, the implementation of current-year write-down allowance must be made, this will kick-start business spending (which is needed to fill the void from lower consumer activity).
Problem is, these types of policies don’t have a snowball’s chance in hell of occurring right now and this is precisely why caution is required.
Week’s Data
We’ll be quiet today but it will be a big week for economic data releases.
Tomorrow we get two major home prices indices, consumer confidence and another regional manufacturing survey. On Wednesday, we’ll receive durable goods orders for July and new home sales. Thursday will bring the first revision to Q2 GDP and initial jobless claims. We’ll round it out on Friday with the personal income and spending figures.
Have a great day!
Brent Vondera, Senior Analyst
Friday’s housing data pushed existing home sales higher by 5% from the year-ago period, the first year-over-year gain since November 2005. One wonders what happens to housing again when the tax credit for first-time homebuyers expires in December and interest rates begin even a mild rise, but the market isn’t interested in such thoughts right now.
On the Bernanke comments, I can’t say it surprises me to see traders push stocks higher on his comments, but the move, if it was actually on those comments, doesn’t make much sense as the preponderant reason for most of the surge from the depths in March is because the “Armageddon” scenario has been removed – the market has already priced in this assumption.
This massive rally since the March 9 low has pushed to 54% now. Back in early March just five of the S&P 500 members traded above their 200-day moving average. In a matter of just six months, 457 of the 500 members now trade above their 200-day, according to David Singer. The entire index trades 18% above its 200-day MA, which is double its premium when stocks hit their all-time highs back in the summer of 2007.
Market Activity for August 21, 2009
Existing Home SalesThe National Association of Realtors (NAR) reported that existing home sales jumped 7.2% in July to 5.24 million units at an annual rate. When we separate single-family units from the data, sales were up 6.5% to 4.6 million units at an annual pace – this marks the fourth-straight month of increase off of the 12-year low.
The median price for an existing home fell 2% in July to $178,400 and is down 15% from a year ago -- still ugly, but up from the cycle low of 17.5% in January.As a result of the sales pick up, the inventory of existing-home supply relative to sales fell to 8.6 months worth of supply, from 8.9 in June. The move from extreme elevation at the end of last year is very welcome, but the current level remains heightened – a number below seven months of supply is consistent with price stability, according to NAR.This is all good news, but the stock market is pricing in too much optimism in my view. Homes sales are being driven by foreclosure-related price declines (31% of July sales were from foreclosed or distressed properties), tax credits for first-time buyers and mortgage rates that are being artificially held low by the Fed’s mortgage-backed purchases.Certainly, there is nothing wrong with the sales from the foreclosure-driven price declines; this is the market at work. But the tax credits will expire in three months and the Fed cannot keep buying mortgage securities (pushing the prices higher and the yields lower) for long, at some point this quantitative easing must be reversed. It will be a while (maybe the end of 2010) before this reversal occurs, but I don’t think the labor market will have healed by then and just as their current action has pushed rates lower, the bounce back will be more pronounced as result of these decisions.
The question remains, what happens to home sales at that point? The market will be completely dependent upon labor-market conditions when these programs run out. I think this is something the market needs to begin thinking about.
Mortgage-Security Problems Persist
We put up a chart of mortgage delinquencies on Friday. That picture illustrated that 9.24% of the mortgage market is at least 30-days delinquent, up from 6.24% a year ago and the 30-year average of 4.97%. When you add in loans that are currently in the foreclosure process that number rises to 13.16%, the highest level ever recorded by the Mortgage Bankers Association – this gauge does not go back to the Great Depression, a period in which these figures were much worse.
I found the chart below also interesting. It shows the potential for pent up foreclosures, a situation at least partially due to states placing moratoriums on the foreclosure process. The rest is due to the damage seen within the labor market, exacerbated by too many homebuyers purchasing more home than they could truly afford.
I bring this to your attention after the WSJ ran a story on Friday explaining that banks (and they were talking about smaller banks) have a lot of bad securities in their trading accounts – mortgage-security pools (some with 40% delinquency rates). These positions will have to be written down and will consume some institutions’ entire capital positions.This is worrisome, but there is one clear way to remedy the situation. We need default rates to substantially slow and real estate prices to rise -- a mild increase is all that is needed. For this we need a burgeoning economy, which will not occur under the current policy path. Instead, we must slash tax rates on labor income, dividends, corporate profits and capital returns; passing all free trade pacts that are currently being blocked by Congress would also be a huge plus. In addition, the implementation of current-year write-down allowance must be made, this will kick-start business spending (which is needed to fill the void from lower consumer activity).
Problem is, these types of policies don’t have a snowball’s chance in hell of occurring right now and this is precisely why caution is required.
Week’s Data
We’ll be quiet today but it will be a big week for economic data releases.
Tomorrow we get two major home prices indices, consumer confidence and another regional manufacturing survey. On Wednesday, we’ll receive durable goods orders for July and new home sales. Thursday will bring the first revision to Q2 GDP and initial jobless claims. We’ll round it out on Friday with the personal income and spending figures.
Have a great day!
Brent Vondera, Senior Analyst
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