Recently, in the U.S. economy, we have been seeing decent jobs numbers, cheaper gas prices, and appreciating wealth in the housing market. The end result is consumers with more money to spend on things that make them happy, such as dining and travel. And I can see an investment opportunity opening up in some restaurant stocks.
When people are confident with their financial situation, they tend to spend more freely.
Take a look at the chart of the Dow Jones US Restaurants & Bars Index, which has been edging higher and appears to be breaking out following a sideways channel. I feel there’s a continued investment opportunity in the sector, as long as the economic growth holds and people continue to feel confident.
Chart courtesy of www.StockCharts.com
Whether it is fast food, family dining, or higher-end dining, the restaurant business is all about marketing food that appeals to diners and meets their needs.
The Long-Term Investment Opportunity: McDonald’s
Over the last couple of years, one of these restaurant stocks was McDonalds Corporation (NYSE/MCD). The seller of the “Big Mac” with the famous golden arches had its issues years ago when diners were caught up in the move to healthier eating. McDonald’s revised its menu and added healthier choices, which resulted in the stock surging back to the top of the restaurant sector.
While McDonald’s remains a long-term investment opportunity, the company has been facing competition from new entrants into the fast food market that offer alternatives.
The Rapidly Expanding Investment: Chipotle
An investment opportunity in restaurant stocks over the past few years has been Chipotle Mexican Grill, Inc. (NYSE/CMG), which … Read More
For those who believe the housing market is set for a downfall after running higher for five years, you may want to rethink that.
The reality is that the housing market is faring quite well right now, boosted by decent jobs growth—more than 200,000 monthly for the majority of 2014—and an unemployment rate at 5.8%.
The fact that the financing costs for the housing market remain historically low translates into what has developed into a healthy demand for new home builds and resale.
In the housing market, the news continues to be good. The key housing starts metric came in at an annualized 1.009 million in October. This was slightly below estimates, but nonetheless a good number. Encouraging was the building permits reading at an annualized 1.080 million units, representing the highest in more than six years. This is a good indication that the housing market is strong.
Other than the homebuilders, we are seeing excellent results and investment potential in the home and commercial building supplies companies.
The “Best of Breed” in this area, The Home Depot, Inc. (NYSE/HD) delivered good results, while rival Lowes Companies, Inc. (NYSE/LOW) beat by a penny and raised its FY15 earnings-per-share (EPS) and revenue guidance to above the consensus. The positive outlook gives investors confidence to expect growth in the housing market going forward, as long as interest rates don’t rise too quickly.
Now you can add companies like the Home Depot and Lowe’s to a longer-term buy-and-hold portfolio, but you may also want to consider taking some money and looking to play the small-cap end of the housing market…. Read More
Investment Opportunity in
Judging by all the headlines alone, you’d conclude that the U.S. housing market is in full recovery mode (it isn’t) and that the U.S. economy is heading in the right direction (it’s not).
In response to existing-home sales data, USA Today’s headline read “Existing home sales up 4.9%; best gain since ’11;” CNBC’s headline declares “US existing home sales, inventory surge in May;” and The Wall Street Journal opines “Existing Home Sales Rise Strongly in May.”
Is the hype justified? Not if you dig below the headlines. First, the (so-called) good news. According to the National Association of Realtors, existing-home sales in May climbed 4.9% month-over-month to a seasonally adjusted rate of 4.89 million, up from 4.66 million in April. This marks the second monthly gain in a row. It’s also the fastest pace since October, the last time annualized sales surpassed the five million units mark! (Source: “Existing-Home Sales Heat Up in May, Inventory Levels Continue to Improve,” National Association of Realtors web site, June 23, 2014.)
All good? Not quite. There’s more to May’s existing-home sales data than the numbers at the top of the press release.
First-time homebuyers, a benchmark for how well the economy is doing, accounted for just 27% of all activity, down from 29% in April. The annual decline is even worse. In May 2013, first-time homebuyers accounted for 28% of sales; in May 2012 it was 34%; and in May 2011 it was 36%. Why is this a concern? The 30-year average for first-time homebuyers—and a number economists consider ideal—is 40%! (Source: Schmit, J., “First-time buyers losing out as home sales rise,” USA … Read More
Housing prices were shooting up since 2011, as if a downslide would never return to the housing market. Meanwhile, my colleagues and I warned investors of a slowdown in activity that could jeopardize the housing market. The authorities at the Federal Reserve then were confident of an economic recovery and took increasing housing prices as a bellwether of economic progress.
During the last winter, home sales declined sharply and everything was blamed on the frigid temperatures, implying the housing market would grow once the season was over and done with. When I last wrote about the U.S. housing market, I noted why it was going to be a big disappointment—this was the time when the majority of investors anxiously waited for the spring tide to kick in, so they could compensate for revenues lost during the winter.
The Federal Reserve, too, was confident of a rebound in the housing market at the turn of the season, but since that never happened, it compelled Fed Chair Janet Yellen to come out last week and mention what we have been predicting in our previous issues. Although she provided an upbeat outlook on the overall economy, her major concerns hovered around the housing market, which she now feels is a bit of a red flag. (Source: Kurtz, A., “Janet Yellen’s Big Concern: Housing Slowdown,” CNN Money web site, May 7, 2014.)
Investors generally overlook hidden numbers in the markets and invest on superficial data that surface in the news headlines of the financial dailies. While following the news might not be that bad of an idea, sometimes, the easily available data can lure … Read More
The housing market continues to hold. But there are some warning signs. Famed investor Warren Buffett suggested the housing market was overvalued and due for an adjustment.
Now, while there are some indications of an overhyped housing market, I’m not convinced it’s bubble-like quite yet. But be warned: mortgage rates and interest rates are heading higher. This means it will become more expensive to finance mortgages going forward.
We are already seeing some fragility in the housing market on nearly all fronts. Home prices continue to edge higher across the nation, but that’s because of the limited inventory in the housing market.
Pending home sales, a good indicator of what is to happen on the horizon, fell eight percent in March based on data from the National Association of Realtors (NAR).
Housing starts were weaker than expected in March, with 946,000 annualized starts in the month, below the consensus 970,000. Worse yet was the March building permits reading that showed an annualized 990,000 in the pipeline, below the consensus estimate of 1.01 million and the 1.018 million in February. The soft showing is a red flag that points to some stalling ahead.
Of course, the horrible winter conditions across the country were largely blamed, but with the warmer months ahead of us, there will be little excuse if we see weaker numbers. This is especially true since the jobs market is showing some increasing strength.
Given what we’re seeing in the housing market, I would be hesitant to jump in and buy the homebuilders. A good alternative in the housing market would be to play the companies in the area … Read More
Home prices are surging in the U.S., which is usually indicative of more investments flowing into the housing market. However, if one looks at the mortgage industry, it points toward the complete opposite.
Mortgage originations have seen a sharp decline in the fourth quarter of 2013 and major banks, including but not limited to Bank of America Corporation, Wells Fargo & Company, and JPMorgan Chase & Co., will be threatened by a further decline in profits if this trend continues into 2014. (Source: Mantell, R. and Rexrode, C., “‘Worst of all worlds’ for mortgage lending in fourth quarter,” MarketWatch, January 15, 2014.)
If mortgage lending is plunging, then what’s driving home prices higher?
In reality, it isn’t the average American Joe buying homes that is driving home prices higher; it’s the institutional investors who are buying homes in bulk—with cash.
Mortgage rates increased around 30% during 2013. With higher rates, fewer people could afford to buy homes, which initially pushed home prices lower, creating a window of opportunity for deep-pocketed institutional investors to lock onto residential properties in cash. This increase in buying took home prices back up to levels out of reach of an average homebuyer, who can seldom buy a home entirely in cash.
About 50% of all home sales in September of 2013 were in hard cash, confirming the growth in buying from institutional investors. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 17, 2014.)
All-cash home sales rose to 35% of total transactions in February of 2014, compared to 32% in February of 2013. However, individual investors only purchased 21% of all … Read More
The retail sector can return some amazing gains as we have witnessed since the recession ended—but it can also provide periods of anxiety.
How the retail sector performs is dependent on many variables, including the economy, jobs, housing, consumer confidence, interest rates, and even the weather, as we witnessed this winter.
There is no tried-and-tested rule on what areas of the retail sector do well. For instance, if you think discount and big-box stores always fare the best, while high-end luxury-brand stocks underperform during times of economic uncertainty, then you are likely off the mark.
The reality is that the past years of massive wealth creation in the stock market and a rebounding housing market have helped to create wealth, and with this comes the desire to spend. There have been some 300,000 new millionaires created in the country in 2013, and that means a propensity to want to spend specifically on higher-end goods and services.
The rationale supports why luxury stocks, such as Michael Kors Holdings Limited (NYSE/KORS) and Tiffany & Co. (NYSE/TIF), have done so well over the past few years. In the luxury retail sector space, Michael Kors continues to be one of my favorite retail sector stocks.
Chart courtesy of www.StockCharts.com
Meanwhile, the bottom end of the retail sector, which includes the discount and big-box stores, has provided mixed results; albeit, these stocks have made investors a lot of money.
One of my favorite discount stocks in the retail sector is Family Dollar Stores, Inc. (NYSE/FDO). But the company recently reported a soft fiscal second quarter, in which same-store sales fell 3.8% in the quarter; year-over-year, … Read More
The United States Census Bureau reported consumer spending in the U.S. economy—adjusted for price fluctuation—increased by 0.2% in February from the previous month. In January, consumer spending increased by 0.1% after seeing a decline in December. (Source: “Personal Income and Outlays, February 2014,” United States Census Bureau web site, March 28, 2014.)
This sent a wave of optimism through the markets. We heard consumer spending is going higher; therefore, the U.S. economy will improve. Buy and buy some more, or you will miss out on future gains was what we were told.
However, I don’t think much thought was given to the increase in consumer spending compared to the previous years. Please look at the chart below. It shows the percentage change in the personal consumption expenditure each February over the last four years.
Change from Previous Month
Data source: Federal Reserve Bank of St. Louis web site,
last accessed March 28, 2014.
There’s a clear trend. The percentage change in consumer spending this past February is the lowest since 2011. But if we were to extend this chart to include the change in consumer spending from December to February, this February saw the lowest percentage change since the same period in 2009 and 2010. This shouldn’t go unnoticed.
Going forward, it looks like consumer spending might even decline further. You have to understand that consumers have to be willing to spend; they have to be optimistic to buy. I look at consumer sentiment as one indicator of consumer spending, and it’s not looking very promising at … Read More
Since the beginning of 2012, the U.S. housing market has been considered one of the bright spots in an otherwise uneven economic environment. Between 2007 and the end of 2011, the U.S. housing market fell 33%—since then, it has rebounded, climbing roughly 22%.
While the rebound in U.S. housing has been robust, it’s still 18% below the 2007 pre-housing bubble market crash high, meaning there’s still plenty of room for growth. Unfortunately, the so-called silver lining around the U.S. housing market is starting to thin—or rather, some are finally starting to recognize there is a disconnect between the rising values of the U.S. housing market and overall housing market data.
For example, existing-home sales, which represent about 90% of housing purchases, fell 0.4% month-over-month in February and 7.1% year-over-year to their lowest level since July 2012. This comes on the heels of disappointing January data, where existing-home sales fell 5.1% month-over-month—the fifth decline in six months.
February new-home sales fell 3.3% month-over-month to a seasonally adjusted rate of 440,000, the lowest level in five months. To add insult to injury, the National Association of Home Builders/Wells Fargo index of builder confidence rose less than forecast in March and is close to its lowest level since May 2013.
February’s pending U.S. housing market sales data is just as disappointing—though not entirely surprising. Pending home sales (excluding new construction) fell 0.8% month-over-month and an eye watering 10.5% year-over-year, the lowest level since October 2011. (Source: “February Pending Home Sales Continue Slide,” National Association of Realtors web site, March 27, 2014.)
In spite of February’s pending home sales data representing the eighth consecutive … Read More
For months and months now we’ve been pointing to seemingly obvious economic data to prove that the U.S. housing market is in trouble because of the weak U.S. economy. Those in the “know”—economists and the real estate board—have been waxing eloquence on how the weather is the main culprit behind the disappointing U.S. housing market numbers.
The National Association of Realtors (NAR) said existing-home sales in December were adversely affected by bad weather in many areas. Sales of existing homes in January were down 5.1%, reaching their lowest levels in 18 months. At the time, the NAR echoed it’s sentiment from the previous month and said the prolonged winter weather was playing a role and positive housing market activity would be delayed until spring.
Well, spring has sprung, and it looks like blaming the weather is getting a little old. Existing-home sales in February fell 0.4% month-over-month and 7.1% year-over-year to their lowest level since July 2012. (Source: “February Existing-Home Sales Remain Subdued,” National Association of Realtors web site, March 20, 2014.)
First-time homebuyers, the litmus test for how well the economy is doing, accounted for 28% of purchases in February—that’s up from 26% in January (which was the lowest market share since the NAR first started compiling monthly data). In February 2013, first-time homebuyers accounted for 30% of sales. The 30-year average for first-time homebuyers is 40%—a number both real estate professionals and economists consider ideal.
As per usual, the U.S. housing market is being propped up by those with lots of money. All-cash sales made up 35% of sales in February—up from 33% in January and 32% in … Read More
I hate to harp on the U.S. housing market so much, but it is a major indicator of the health of the U.S. economy. Following previous recessions, investment in the U.S. housing market increased early on and helped drive the recovery. In fact, the U.S. housing market was a major factor that helped lift the U.S. economy out of past recessions in 1981, 1990, and 2001. But it isn’t happening this time around.
According to the National Association of Home Builders, the U.S. housing market contributes to the country’s gross domestic product (GDP) in two ways: private residential investment and consumption spending on housing services. Historically, residential investment, which includes construction of new single-family and multi-family structures, residential remodeling, the production of manufactured homes, and brokers’ fees, has averaged around five percent of U.S. GDP. (Source: “Housing’s Contribution to Gross Domestic Product (GDP),” National Association of Home Builders web site, last accessed March 3, 2014.)
Housing services, which includes gross rent, utility payments, and imputed rent (an estimate of how much it would cost to rent owner-occupied units), averages between 12% and 13%. That leads to a combined total of 17%–18%.
But the U.S. housing market has been falling short as an engine of economic growth. In 2005, residential investment accounted for 6.1% of U.S. GDP. In 2012, it accounted for just 2.8%, and it has averaged just three percent since then—meaning that two percent of the national GDP is missing from private residential investment.
More broadly, since the U.S. housing market collapsed in 2008, the industry has made less than half its normal contribution to U.S. economic growth. According … Read More
It doesn’t take much to get the bulls excited when it comes to the U.S. housing market. Solid new-home sales data seems to have erased everyone’s memory of the raft of negative housing market numbers that have been flowing in for months.
But first, the good news! The U.S. Department of Commerce announced Wednesday that sales of new U.S. single-family homes soared 9.6% month-over-month in January to a seasonally adjusted annual rate of 468,000, the highest level since July 2008. January’s numbers are also 2.2% ahead of January 2013 estimates of 458,000. (Source: “New Residential Sales in January 2014,” United States Census Bureau, February 26, 2014.)
While Wall Street is busy blaming the cold weather for weak earnings, the winter winds have not held back new-home sales. In fact, in sharp contrast to Wall Street’s cold weather blame game, regions hardest hit by unusually cold temperatures experienced solid growth, easing concerns of a sharp slowdown in the U.S. housing market.
Sales in the Northeast soared 73.7% to a seven-month high, sales in the south climbed 10.5% to a more than five-year high, and sales in the west climbed 11%. The only region to experience a drop in new-home sales was the Midwest, where new-home sales retraced 17%.
If new-home sales were the foundation of the U.S. housing market’s health, everything would be looking up. Unfortunately, they’re not. That’s because new-home sales represent a small segment of the U.S. housing market—just 9.2%.
New-home sales figures, because they are measured when contracts are signed, are considered to be more sensitive to weather than existing-home sales, which are tallied when contracts close. So … Read More
No matter where you turn, bad earnings or economic indicators are being blamed on the cold weather. Weak January car sales figures were blamed on the weather; disappointing January housing data was blamed on the weather; Wal-Mart Stores, Inc. (NYSE/WMT) revised its earnings guidance lower because of the weather; and even Panera Bread Company (NASDAQ/PNRA) says the cold weather negatively impacted its results.
Because no one saw the cold winter weather coming, Americans have been left hungry, cold, and without vehicles or shelter. Though somehow, people too cold to get bread, groceries, or other staples still managed to stock their shelves with soup. Campbell Soup Company (NYSE/CPB) bucked the winter-blaming trend and said its quarterly profits surged 71% year-over-year to $325 million, or $1.03 a share.
But that’s not what I’m getting at…
The most recent industry to use the weather-related get-out-of-jail-free excuse is the housing market. I mentioned recently that the National Association of Home Builders (NAHB) said its monthly housing market sentiment index experienced its largest drop in history, from 56 in January to 46 in February. A score above 50 indicates positive sentiment; below that, it’s negative. (Source: “Poor Weather Puts a Damper on Builder Confidence in February,” National Association of Home Builders web site, February 18, 2014.)
In line with negative homebuilder sentiment, perhaps it’s not a huge surprise to discover that construction of new homes sank in January. U.S. housing market starts tanked 16% in January to a seasonally adjusted rate of 880,000—the lowest reading since September and the largest month-over-month drop in three years. Further breaking down the housing market starts, single-family housing construction … Read More
If the state of the U.S. housing market is a key indicator on the health of the U.S. economy, things aren’t looking great. Against a backdrop of an obviously weak U.S. economy, U.S. housing prices have been rising steadily higher, beyond the reach of affordability for the average American.
According to a CoreLogic report, national housing prices are expected to climb 10.2% year-over-year. In 2012, U.S. housing prices increased 11%. While these are solid numbers, it’s important to remember that U.S. housing prices are still roughly 20% below their 2007 pre-recession highs. (Source: Gruszecki, D., “HOUSING: CoreLogic report, Inland home prices up 22% in January,” The Press-Enterprise web site, February 4, 2014.)
In spite of this divergence, fewer homebuyers are able to actually take advantage of the near-record-low interest rate environment and get into the market. That’s because first-time homebuyers—the fuel of the U.S. housing market—are being shut out by investors.
First-time homebuyers account for just 27% of all U.S. housing purchases in December—a huge spread over the 30-year average of 40%. But in spite of U.S. housing prices still being depressed compared to 2007, December existing-home sales rose just one percent month-over-month, which was less than expected.
Granted, some will say that first-time homebuyers tend to purchase lower-priced homes and are not necessarily a true reflection of the U.S. housing market. New homes are, as that theory goes, more geared toward those looking to climb up the property ladder. Well, for those who recall, December new-home sales fell more than expected—seven percent to a seasonally adjusted annual rate of 414,000. At the time, we were told not to worry, … Read More
If January is any indication of the stock market action in 2014, we’re in for a long year. After a scorching year, the key stock indices are ending the first month of 2014 in the red. As we say goodbye to January, it’s worth noting that the S&P 500, after notching up five-percent in the first month of 2013, gave up three percent of its value during the first month of 2014.
The other indices aren’t faring any better. The NYSE posted a 3.8% gain in January 2013, but lost 3.2% of its value in January 2014. The Dow Jones Industrial Average gained six percent in January 2013, but at the close of January 2014, it’s down almost five percent.
But, if you listen to the overly optimistic statisticians, a bad January does not necessarily portend a bad year. Since 1962, in January, the S&P 500 has fallen by more than four percent nine times. But, when that occurs, the S&P 500 is actually up between February and the end of the year—though barely. During those nine years with losing Januarys, the average February–year-end returns tallied 1.08%. (Source: Ratner, J., “A weak January for stocks isn’t as bad as you think,” Financial Post, January 31, 2014.)
Though, there are some statistical anomalies in there that might just be helping the so-called as-goes-January seasonal anomaly, in two of the nine years (1968 and 2009), the S&P 500 reported double-digit gains over the final 11 months of the year. In 1968, the S&P 500 was up 12.1%; in 2009, it was up 35.3%.
In the same time, the S&P 500 saw a … Read More
Ah, the U.S. housing market, the so-called silver lining in the U.S. recovery—but not for long, as it may be rusting. The U.S. housing numbers are in, and they aren’t spectacular.
In the U.S. housing market, December existing-home sales rose one percent month-over-month at an annualized pace of 4.87 million units. Analysts were expecting December existing-home numbers to come in at 4.93 million. The one-percent increase also has to be taken with a grain of salt, as it was helped, in part, by a downward revision in November existing-home U.S. housing market sales to 4.82 million units. (Source: “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of Realtors web site, January 23, 2014.)
The December existing-home U.S. housing market sales of 4.87 million are also 0.6% below the 4.9-million-unit level recorded in December 2012. And sales of existing homes were down 27.9% at an annualized rate for the entire fourth quarter.
First-time home buyers—the fuel of the U.S. housing market—accounted for just 27% of all purchases in December, down from 28% in November and October and 30% in December 2012. That’s a huge drop over the 30-year average of 40% and a number real estate professionals and economists consider ideal. It is also the lowest level since the National Association of Realtors began tracking this metric in 2008.
First-time home buyers, who tend to purchase lower-priced homes, are being pushed out of the U.S. housing market recovery by all-cash sales. All-cash sales accounted for a whopping 42.1% of all U.S. residential sales in December, up from 38.1% in November and 18.0% in December 2012. (Source: “Short Sales … Read More
The U.S. housing market is facing issues that must be addressed. The reality of the matter is that home buyers are still missing from the market—these are the people looking to buy a home and stay in it for a long time. If home buyers don’t come back to the housing market, hopes for the increase we saw in home prices in 2012 and 2013 will diminish very quickly.
Existing-home sales data confirmed this: home buyers are just not excited to buy. According to the National Association of Realtors, in December, first-time home buyers accounted for only 27% of all existing-home transactions in the U.S. housing market. This number had declined from 30% in December of 2012. (Source: “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of Realtors, January 23, 2014.)
But that isn’t all. Indicators that suggest home buyers will or may come to the housing market in full-steam aren’t in favor, either. Affordability is the main concern for home buyers; they buy homes when they can afford to. Sadly, we are seeing a rise in mortgage rates. As these rates increase, homes become less affordable for first-time home buyers, who will have to pay higher mortgage payments.
How much have mortgage rates increased? In December of 2012, the 30-year fixed mortgage rate tracked by Freddie Mac was 3.35%. In December of 2013, it increased to 4.26%—or an increase of more than 27%.
This is all too dangerous for the housing market. You want to see a continuous flow of first-time home buyers in the market. Instead, they have been shying away for some time. Investors … Read More
By Sasha Cekerevac for Daily Gains Letter | Jan 22, 2014
One of the hardest lessons to learn is to buy assets when others are selling them. As an investment strategy, if there is value in something, at some point, the market will rebound, provided that there are fundamental reasons for this to occur.
Take the case of our housing market. From the depths of the Great Recession until now, the housing market has made a huge move up. Yes, it was pushed by the Federal Reserve, but there were fundamental reasons why the housing market showed value as an investment strategy.
One company that I’ve liked for many years is The Blackstone Group L.P. (NYSE/BX). This firm is filled with smart people who are willing to buy an asset when others are negative, looking at the investment strategy from a long-term point of view.
Blackstone has become the largest single-family housing rental company in the U.S. When the housing market collapsed, they saw an investment opportunity, as many homes were selling below the cost of building them. Plus, the yield they were able to obtain in the housing market was far higher than many other investments at that time.
The company bought more than 40,000 homes in the U.S., spending $7.5 billion. Obviously, Blackstone made a huge return in the U.S. housing market. But now Blackstone’s turning its sights overseas.
The U.S. wasn’t the only nation to be hit with a housing market meltdown. Spain’s housing market has seen a 40% drop in prices, and Blackstone now believes this, too, is a great long-term investment opportunity.
Blackstone recently paid $173 million for 18 apartment buildings in Madrid, and the company … Read More
Our neighbor to the north is facing some headwinds. In Canada, there are troubles developing that may drive the country toward an economic slowdown. In 2008, the ripple effects from the U.S. economy into the global economy caused an economic slowdown in many countries. The Canadian economy was one of the few nations that didn’t suffer a major hit; it was able to stand strong.
Now, Canada may not be able to stay on such strong footing, as it faces a possibly severe economic slowdown due to a few phenomena that are starting to line up to create a perfect storm.
First of all, the housing market in the Canadian economy is becoming much overvalued. According to Deutsche Bank, the Canadian housing market is the most overvalued housing market in the global economy. Looking at the value of the Canadian housing market as a ratio of home prices and rent, this market is overvalued by 88%. (Source: Babad, M., “Canada’s housing market most overvalued in the world, Deutsche Bank says,” The Globe and Mail, December 11, 2013.)
As we move through the beginning of 2014, the Canadian housing market is showing signs of a slowdown. Building permits, one of the early indicators of which direction the housing market is headed, saw a 6.7% decline month-over-month in November. (Source: “Building permits, November 2013,” Statistics Canada web site, last accessed January 9, 2014.) If the housing market soon faces troubles and prices decline, a major economic slowdown could follow.
Secondly, the employment situation in Canada, another indicator of an economic slowdown, is becoming dismal. In December, Canada’s unemployment rate increased by 0.3% … Read More
Trading for 2014 has begun. In 2013, we saw massive moves on the key stock indices—something we have only seen a few times. For example, the S&P 500 moved up by almost 30%, and the NASDAQ Composite increased by more than 35%. Those who were long saw their portfolio grow, and those who went against the key stock indices probably had to question their strategy and re-allocate the capital.
You can see for yourself in the chart below: key stock indices such as the S&P 500 maintained an upward trajectory throughout the year—and without any major hiccups.
Chart courtesy of www.StockCharts.com
The average return on the S&P 500 between 1970 and 2012 was 8.2%; on the Dow Jones Industrial Average, it was 7.9%; and on the NASDAQ Composite, it was just slightly more than 13%. (Source: “Historical Price Data,” StockCharts.com, last accessed January 2, 2013.)
Sadly, these numbers only indicate past performance. With the beginning of the new year, investors have one main question in mind: where are the key stock indices going to go in 2014? Will we see a decline or are we in for another stellar year?
The year 2014, I believe, is going to be an interesting year for stock investors. The rally in the key stock indices that started in 2009 continues to march forward. As this is happening, the fundamentals that act as fuel for the stock market rally are becoming anemic. This should be noted, because without fundamentals becoming stronger, key stock indices can only go so far.
For instance, on the surface, the U.S. gross domestic product (GDP) looks better than before, … Read More
Investors are a surprising lot. Since May, any suggestions about tapering by the current Federal Reserve chairman, Ben Bernanke, or even one of the dozen district Federal Reserve economists, sent the markets reeling.
Back in May, just the whisper of a hint from the Fed that it might consider tapering its $85.0-billion-per-month bond buying program was enough to stop the bull market in its tracks. It recovered, of course, but only after Bernanke soothed the markets by saying he had no intention of pulling back on the Fed’s quantitative easing (QE) policy anytime soon.
The general fear, of course, was that any reduction in QE would translate into an immediate rise in interest rates. Having kept interest rates artificially low (near zero), the Fed made it cheaper for people to borrow. As a result, these artificially low interest rates are generally recognized as being the fuel that’s been propelling the stock market increasingly higher.
The Federal Reserve quashed those fears last week after announcing a $10.0-billion monthly cut in its QE strategy by telling investors it wouldn’t raise interest rates until unemployment hits 6.5%. By the Fed’s own estimates, the country will not hit this target until late 2014 to mid-2015. So, artificially low interest rates live on.
The assurance of cheap money kept the markets upbeat; so much so that the following day, the Dow Jones Industrial Average and S&P 500 opened at record highs, and the NASDAQ opened at a 13-year high.
News on a few key economic indicators released last Thursday, the day after the Federal Reserve’s announcement, probably didn’t hurt either, as these indicators suggested the … Read More
Mortgage rates are on the rise. In November, the 30-year fixed rate mortgage stood at 4.26% compared to 3.35% a year earlier in November 2012. The average rate for the 30-year fixed rate mortgage in 2007 prior to the subprime meltdown was 6.34%, according to data from Freddie Mac. (Source: “30-Year Fixed Mortgage Rates Since 1971,” Freddie Mac web site, last accessed December 13, 2013.)
Much of the decline in mortgage rates was driven by the Federal Reserve’s massive quantitative easing policies that saw the central bank buy $85.0 billion in bonds per month in an effort to drive down lending rates and drive up consumer demand in the housing market.
Yet after adding trillions to the balance sheet of the Fed, the housing market has recovered and is currently on pretty solid ground, with higher demand and prices.
But all of this bond buying will eventually stop and the impact will push mortgage rates higher. Of course, the amount by which bond buying is reduced will be dependent on the economic renewal and jobs market. I do not know how high mortgage rates will rise in one, two, or even five years, but they will move higher as long as the economy and jobs market continue to improve.
The housing market could easily absorb a small rise in mortgage rates, but with the lowest mortgage rates behind us for the time being, I suspect the housing market will inevitably slow down as far as home price increases and sales. This could take a few more years.
With the Fed expected to begin its bond tapering early in the New … Read More
As each day passes, more and more evidence builds up against the housing market in the U.S. economy. A significant amount of data is suggesting that the housing sector is cooling and will not continue to increase like it did in 2012, when institutional investors came in and bought homes in bulk, causing prices to skyrocket in some areas.
When I am looking at the housing market, I want to see home buyers. If the number of home buyers in the market increases or there are indicators that suggest it will increase, then I see no problem in thinking the housing market in the U.S. economy is going to see an uptick. But as it stands, this is not the case; home buyers are shying away from the housing market.
The first evidence we’ve seen is through mortgage application activity tracked by the Mortgage Bankers Association. For the week ended November 28, applications for home loans in the U.S. economy declined 12.8% from the previous week. They have been declining for five consecutive weeks and now sit at their lowest level since September. If buyers were rushing into the U.S. housing market, we would see these numbers soar higher, not edge lower. (Source: “U.S. mortgage applications slide for fifth straight week: MBA,” Reuters web site, December 4, 2013.)
Secondly, existing home sales in the U.S. economy are suggesting a very similar phenomenon—buyers are not present. I look at first-time home buyers to see demand and, as I have said before, they are just not excited to buy. (See “More Evidence Housing Market Is Turning Cold.”)
Last but not the least, … Read More
Good news is not always what it seems. On the surface, October’s new U.S. housing market sales numbers came in well above the forecast. But dig a little into the foundation of the report, and you’ll find more than a few reasons to be skeptical.
But before we dig deeper, let’s first take a look at the overall numbers. In October, sales of new single-family houses came in at a seasonally adjusted rate of 444,000, a whopping 25.4% increase month-over-month above the revised September rate of 354,000 and a 21.6% increase year-over-year. (Source: “New Residential Sales in October 2013,” United State Census Bureau web site, December 4, 2013.)
Those are pretty solid numbers—at least, until you factor in the 20% margin of error on the numbers provided by the U.S. Census Bureau and Department of Housing and Urban Development.
On top of that, sales for June, July, August, and September were all revised lower. Sales were revised downward by 0.9% in June, 4.4% in July, 10% in August, and 6.6% in September.
It’s also all about perspective. On one hand, you could champion the U.S. housing market recovery by noting that the 25.4% increase from September was the biggest one-month gain in more than 30 years! On the other hand, October’s new U.S. housing market home starts number is tempered a little when you consider the September 2013 rate of 354,000 was the weakest reading since April 2012.
Still, you can’t ignore the fact that new starts in the U.S. housing market are up month-over-month—but what’s fueling the growth? It can’t be a result of sustained jobs growth, as the … Read More
The U.S. housing market is in trouble, and it’s foolish to believe that it’s going to show gains like it did earlier this year and in 2012. More and more evidence is lining up in favor of the housing market in the U.S. economy seeing stagnant growth, or maybe even heading for a downturn.
It is not stressed enough that the housing market depends on home buyers; if they don’t buy, robust growth doesn’t occur.
This phenomenon is currently taking place in the U.S. housing market—the home buyers are shying away. According to the National Association of Realtors, sales for existing (already built) homes declined for the second consecutive month in October. For that month, first-time home buyers only accounted for 28% of the existing home sales in the U.S. housing market. This amount is equal to September and lower than October of 2012, when first-time home buyers made up 31% of all existing home sales. (Source: “October Existing-Home Sales Cool but Low Inventory Drives Prices,” National Association of Realtors web site, November 9, 2013.)
The reason this is happening is because the mortgage rates are continuously increasing. In October, the Freddie Mac 30-year fixed mortgage rate was 4.19%, while this rate was 3.38% a year ago—an increase of 24%.
Sadly, rates are expected to increase further. In a statement, the Federal Reserve implied that it might be moving ahead with the tapering of quantitative easing in the upcoming months, though no date was provided; when we heard something similar in May, we saw an increase in bond yields, which mortgage rates are highly correlated upon. This time will be … Read More
Major economic hubs in the global economy are in outright trouble, and each passing day there’s more economic data suggesting the slowdown is holding its own. Investors need to be wary about what’s happening, because it can affect their portfolio significantly.
The eurozone crisis, which sent ripple effects into the global economy, is rising again. In the early days of the eurozone crisis, we heard how the economies of such nations like Greece, Spain, and Portugal were suffering. Now, the bigger nations in the euro region are showing signs of stress. Consider France, the second-biggest economy in the eurozone, for example. This major economic hub in the global economy witnessed contraction in the third quarter. On top of this, France’s unemployment rate continues to increase.
Germany, the biggest economy in the eurozone and the fourth-biggest economic hub in the global economy, slowed in the third quarter. The gross domestic product (GDP) of the country increased just 0.3% in the third quarter. In the second quarter, Germany’s GDP increased by 0.7%. (Source: “Gross domestic product up 0.3% in 3rd quarter of 2013,” Destatis, November 14, 2013.)
Similarly, Japan, the third-biggest nation in the global economy, continues to struggle, despite the extraordinary measures the central bank and Japanese government have taken to boost the economy. In the third quarter, the growth rate of the Japanese economy slowed down. The GDP grew 0.5% from the previous quarter. The annual GDP growth rate of the Japanese economy was 1.9% in the third quarter. (Source: “Gross Domestic Product: Third Quarter 2013,” Cabinet Office, Government of Japan web site, November 14, 2013.)
Adding more to the … Read More
It’s as bad as expected, or should I say so far so good? I have been critical about the housing market in the U.S. economy for some time now; I don’t buy the blind optimism that is heard in the mainstream these days, which states the housing market will continue to increase at the rate we have seen in 2012. I stand in the camp that says we are not going to see a crash like the one we saw not too long ago, but at the same time, the increase in the U.S. housing market won’t be as exuberant as we witnessed last year—in fact, we might even see a correction going forward.
It’s not just me saying this; Fitch Ratings also agrees with this notion. According to its U.S. RMBS Sustainable Home Price and Economic Risk Factor Report, home prices in the U.S. housing market are overvalued by 17% as per Fitch’s Sustainable Home Prices (SHP) model. The rating agency said that the U.S. housing market has increased 20% year-over-year; this is the highest growth rate in any time in the last 10 years. (Source: “Fitch: Several U.S. Cities Nearing Bubble-Year Home Price Peaks,” Fitch Ratings web site, November 6, 2013.)
Here’s why the housing market looks to be facing hardships going forward.
The U.S. economy is still in trouble, as the financial crisis has left deep wounds that haven’t healed. If someone doesn’t have enough income to pay for their expenses and they’re relying heavily on government assistance, such as food stamps, would they actively look to buy a home? I don’t think it would be their … Read More
Numbers don’t lie: the rich are getting richer, and they’re using their money to increase their U.S. housing real estate portfolios. The rest of the country, on the other hand, is getting poorer, and has been priced out of the U.S. housing market, being forced to rent the American dream.
While U.S. housing prices are still down roughly 23% from their 2006 pre-recession highs, they’ve increased 16% since the beginning of 2012. This is more than enough to price those who have the income to pay a mortgage and desire to own a home out of the market—not so much as to deter investors (institutional and individual) from aggressively adding to their burgeoning real estate portfolio, though.
In fact, many first-time home buyers are being bid out of the market because of demand from investors. First-time home buyers accounted for just 28% of purchases in September; that’s a substantial decrease over the 30-year average of 40%, and a number that real estate professionals and economists consider to be ideal. These depressed numbers are the new reality; first-time buyers made up just 28% of all purchases in August, a bit worse than the 29% recorded in July. (Source: Mutikani, L., “U.S. existing home sales fall, price appreciation slows,” Reuters web site, October 21, 2013.)
For the not-so-average American, it’s a U.S. housing boon. Investors (those who purchased 10 or more properties in the last 12 months) accounted for 14% of all residential sales in November; that’s up three percentage points both year-over-year and from the previous month. Incredibly, all-cash sales climbed to 49% from 40% in August and 30% one year … Read More
The best time to look at certain sectors and stocks is when investors are running for the exits. Unfortunately, the U.S. government shutdown and looming debt ceiling deadline have sent investors scurrying in every direction. Still, one area that will be negatively impacted should the U.S. government shutdown continue and the debt ceiling limit not be raised is the slowly rebounding U.S. housing market.
That doesn’t mean investors should shun the U.S. housing market and homebuilder stocks altogether; if anything, the current lull is the perfect time to take a closer look at this sector. Both the shutdown and debt ceiling will eventually be in the rearview mirror and the wheels of economic progress will sputter back to life.
According to the latest S&P/Case-Shiller Home Price Index, U.S. house prices rose 12.4% for the 12 months ended July 31, the biggest annual increase since February 2006. Home prices, which have climbed 16% since the beginning of 2012, are still roughly 22% below their 2006 pre-recession highs, meaning, there is still plenty of room to run before the U.S. housing market can say it has fully recovered.
Unfortunately, the U.S. government shutdown and fears about the debt ceiling are coming just as construction and new housing sales are beginning to show signs of life. Residential starts in August were up slightly (0.9%), with an annual pace of 891,000—a marked improvement over the April 2009 low of 478,000 starts.
There are a number of ways a long-term government shutdown would exacerbate growth in the U.S. housing market. Because federal employees are furloughed, there is no one to approve mortgages; those in the … Read More
While quantitative easing (QE) may have been put in place to kick-start the economy, it also had the added benefit of kicking income investors to the curb. Since implementing QE1 in November 2008, the Federal Reserve has printed over $3.0 trillion to snap up government bonds.
This has translated into artificially low interest rates, which are supposed to spur borrowing. A low-interest-rate environment has also helped fuel the stock market and put a smoldering spark in the housing market and auto industry. Those same record-low interest rates have also sucked the income out of America’s retirement portfolio.
In a high-interest environment, fixed income assets like Treasuries, bonds, and certificates of deposit are an important part of most retirement portfolios. In theory, they provide regular investors with a stable place to park their retirement money and a means to anticipate a reliable income stream.
In 1980, Treasury bonds peaked at an eye-watering 14%. Today, a 30-year Treasury bond provides a yield of just 3.67%, a far cry from 1980 and a long way from the 5.3% yield in late 2007—before the financial crisis began.
In order to diversify risk, invest in multiple asset classes, and take advantage of growing dividend yields, many investors have turned to exchange-traded funds (ETFs). ETFs are a great option for broad-based investing, especially for those who do not have deep pockets. In fact, with a simple ETF strategy, investors can build a well-diversified portfolio made up of small-, medium-, and large-cap stocks.
While ETFs continue to grow in popularity, investors looking for more options might want to consider exchange-traded notes (ETNs). On the surface, ETNs are … Read More
When it comes to the U.S. housing market, everything may look perfect on the surface, with homes being swept up at a rapid pace. However, this could all fall apart with the answer to one simple question: do existing-home sales numbers signal continued strength in the U.S. housing market and housing market-related stocks?
U.S. existing-home sales climbed 1.7% month-over-month to a seasonally adjusted annual rate of 5.48 million in August from 5.39 million in July. The year-over-year numbers are even more staggering, up 13.2% over the 4.84 million level in August 2012. While U.S. housing market sales are at their highest peak since February 2007, they are also above year-ago levels for the past 26 months (June 2011). (Source: “August Existing-Home Sales Rise, Limited Inventory Continues to Push Prices,” Realtor.org, September 19, 2013.)
Unfortunately, for many reasons, the party in the U.S. housing market might be short-lived.
In January, the interest rate on a 30-year fixed mortgage was around 3.41%; today, it’s 4.55%. While one percentage point might not sound like much, it translates into an increase of more than 30%. With mortgage rates on the rise, many first-time home buyers fear that affordability will be out of reach. (Source: “Average Mortgage Rates: January 2013,” MortgageNewsDaily.com, last accessed September 19, 2013.)
In an effort to do a runaround on rising interest rates, many first-time home buyers are jumping into the housing market. While interest rates are on the rise, it’s important to remember that they’re still well below the 6.48% level offered in August 2008, just before the housing market crashed. Still, the rise in interest rates was enough to … Read More
The housing market is one of the biggest challenges currently faced by the U.S. economy. When it improves, or when we see an increase in activity, then it can be assumed that there will be some economic growth.
For example, if there’s activity in the housing market, meaning that home buyers are buying homes, those home buyers are going to need things that are necessary to run households. This phenomenon has long-lasting effects: it increases consumer spending in the U.S. economy and creates jobs.
When the housing market in the U.S. economy improved in 2012, we saw the gains; but going forward, we are seeing a significant amount of trouble.
First of all, the U.S. economy is in jeopardy, on the brink of a monetary policy shift—the primary concern being quantitative easing. We are hearing the Federal Reserve will start to slow its asset purchases in September and end the quantitative easing by next year. This monetary policy by the Federal Reserve kept the mortgage rates in the U.S. economy low. This was great, as it gave Americans incentive to buy homes; as a result, we saw the housing market improve. Now, with the speculations on quantitative easing ending, the mortgage rates in the U.S. economy are increasing.
Consider the 30-year conventional mortgage rate tracked by Freddie Mac. In August, this rate stood at 4.46%; in the same period a year ago, it was at 3.60%, meaning it has increased almost 24% in the matter of a year. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site, last accessed September 11, 2013.)
While some will argue that these mortgage … Read More
Students aren’t the only ones unhappy this back-to-school season. U.S. companies in the retail sector, which rely on back-to-school shoppers to propel their mid-year sales, are also despondent. Perhaps not surprisingly, August’s bearish consumer sentiment reading of 80.0 has translated into tepid spending on everything back-to-school, including clothing, backpacks, shoes, notebooks, and laptops. (Source: “U.S. consumer sentiment weakens in August,” Reuters, August 16, 2013.)
August sales in U.S. chain stores climbed a modest 3.7% year-over-year; that’s up a sliver from July’s 3.5% gain, but down significantly from the six-percent gain reported in August 2012. While some U.S. retail sector stocks reported stronger-than-expected August sales, many had to resort to slashing prices to get there. The Gap, Inc. (NYSE/GPS), one of the biggest apparel metrics, said August sales were up three percent. (Source: “August Chain-Store Sales Post Gain of 3.7%,” ICSC.org, September 5, 2013.)
Next to the winter holidays, the back-to-school season (which runs from mid-July to mid-September) is the second-biggest period for shopping. And in an effort to boost mediocre revenues in the third quarter (ended September 30), many stores in the retail sector are expected to continue offering even steeper discounts.
While back-to-school sales are not the most reliable predictor for how the American retail sector will do during the November and December shopping seasons (which can account for 40% of annual sales), they are a good reflection of ongoing consumer confidence—and the American economy as a whole.
Sure, the average American homeowner has (apparently) seen their personal wealth increase as a result of a slightly improving housing market, but that’s all on paper. Most Americans are faced with … Read More
The U.S. housing market is starting to show signs of stress, something I have been expecting for some time. Will the housing market see negative growth? Time will tell, but as we are marching ahead, one thing is becoming very clear: if it grows, the rate won’t be as robust as we saw during 2012.
In 2012, the S&P Case-Shiller 20-City Home Price Index—an indicator of the U.S. housing market that tracks home prices in 20 major cities—increased 7.08%. The index stood at 136.88 in January, and in December, it settled at 146.88. (Source: “S&P Case-Shiller 20-City Home Price Index,” Federal Reserve Bank of St. Louis web site, August 27, 2013.)
The issues at hand are the problems facing the housing market—namely, home buyers’ willingness to buy and the increasing inventory.
Home buyers had a good incentive to get into the housing market in 2012 because of low mortgage rates. Consider the standard 30-year fixed mortgage reported by Freddie Mac: in July of 2012, it was 3.55%, and in December, the rate went as low as 3.35%. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site, last accessed August 28, 2013.)
Fast-forward to July of this year: rates have increased more than 23%, standing at 4.37%. Those who are looking for a home are driven away from the housing market by rising mortgage rates, making homes less affordable.
That said, I agree the rates are nowhere close to what they were back in the 1980s, but they have shot up really quickly in a very short period of time. You also have to consider that home buyers in the … Read More
It wasn’t all that long ago that first-time home buyers were responsible for fuelling the housing market. They’d buy starter homes and fix them up; this helped sellers move to bigger homes, and so on. Then the housing market crisis began, and everything became topsy-turvy.
Today, first-time home buyers are competing with well-heeled individuals and investors looking to snap up distressed houses at bargain prices. This simple shift could undermine the long-term growth of the still-struggling U.S. housing market.
The most recent data shows that more than half of all homes sold last year and so far this year in the U.S. have been paid for in cash. Before the housing market crisis, just 20% of all homes were purchased with cash; since then, the all-cash purchase rate has more than doubled.
Why the huge increase? Even though mortgage rates continue to hover near record low levels, many first-time home buyers have been locked out due to tighter lending rules. They’re also getting outbid by well-heeled investors and institutions looking to add real estate to their portfolio. Many homeowners cannot trade up to a larger home because their homes have, since 2007, lost so much of their value—which means many homeowners are staying put.
A 2012 poll of homeowners, conducted by the National Association of The Remodeling Industry, found that more than a quarter of respondents (26%) said they plan to stay in their homes for an additional 16 to 20 years, because their home’s value decreased so much during the recession. On top of that, 23% said they were going to stay put for an additional six to 20 … Read More
The road to home ownership in America may have been paved with good intentions, but the current housing market recovery shows it’s not leading to Oz. Even though home values are on the rise, U.S. home ownership, at 65%, is at its lowest level in 18 years—and for some, that’s still too high.
Since the real estate market bubble burst in 2007, a number of riskier borrowers have been squeezed out. At the same time, there are a lot of potential first-time home buyers unable to take advantage of near-record-low borrowing costs and get into the housing market because banks are wary of lending. And for a sustained housing market to take hold, first-time home buyers need to be able to actually access the housing market.
In fact, the so-called “housing market recovery” isn’t really benefiting those Washington has been pushing for. Thanks to tax credits that were made available when the Great Recession began, first-time buyers accounted for more than 50% of U.S. housing market sales as of 2009. That’s a substantial increase over the 30-year average of 40%.
The U.S. housing market has experienced some major changes since then. Today, first-time home buyers account for just 29% of sales. One could argue that first-time home buyers, typically in their 20s and 30s, don’t have enough credit history to get a mortgage. And because of stagnant wages and mile-high unemployment, they haven’t had time to build up a nest egg. After being bailed out by tax payers, banks are no longer willing to lend to those they believe are untrustworthy.
So while affordability in the U.S. housing market is … Read More
On July 23, the Dow Jones Industrial Average hit an all-time intraday high of 15,604.22. That same day, the S&P 500 also hit a new high of 1,698.78. With the markets doing so well, you could be forgiven for thinking today’s baby boomers are laughing all the way to the bank.
But that’s not so! Most baby boomers haven’t really benefited from the bull market. While it runs with reckless abandon, it’s leaving behind most Americans who are in retirement. Over the last five years, stocks and bonds have rallied, but the housing market has remained relatively flat. That means affluent Americans who park their assets in stocks and other financial products have done quite well. Those Americans with their wealth tied up in the value of their homes, however, have not.
Since the beginning of the current bull market in 2009, the S&P 500 has climbed more than 160%. U.S. housing prices, on the other hand, are still more than 25% below their 2006 highs.
Retiring baby boomers are also facing another challenge. Early boomers—those between 61 and 65—are more financially stable (for the most part) than their younger peers (those between 50 and 55). The early boomers worked during a period of economic stability in an era when defined benefit plans were the norm. In 1965, the inflation rate was 1.59%; by 1970, it had risen to 5.84%.
The late boomers, in contrast, started working in a more unsettled economic time. In the 1980s, many companies rolled their retirement plans over to 401(k) accounts, tying their self-directed retirement savings to the ups and downs of the stock market. … Read More
A lot of housing market data has come out over the last week or so, and in typical fashion, we tend to overstate the positive and underestimate everything else. However, by looking at the data collectively, it becomes apparent that the U.S. housing market recovery isn’t as robust as it seems. On top of that, it turns out this so-called recovery isn’t the economic savior everyone has been hoping for; in fact, it only has a modest impact on the nation’s overall economic recovery.
According to Realtor.com, housing inventories are rising faster than usual, despite the busiest spring and summer selling season in four years. The total number of existing homes for sale in June increased 4.26% month-over-month to 1.93 million, representing the sixth consecutive month of inventory growth. (Source: “June 2013 Real Estate Data,” Realtor.com, July 17, 2013.)
On July 17, the U.S. Department of Housing and Urban Development said June building permits were down 7.5% month-over-month at 911,000, while privately owned housing starts were 9.9% off May’s estimate at 836,000. These numbers show that the U.S. housing market recovery is in serious jeopardy. (Source: “New Residential Construction in June 2013,” U.S. Census Bureau, July 17, 2013.)
It was also announced that first-time home buyers in June accounted for just 29% of all existing sales in the U.S. housing market, translating into a little more than nine percent year-over-year. In a healthy housing market, first-time home buyers should account for 40% of all existing-home sales. (Source: “June Existing-Home Sales Slip but Prices Continue to Roll at Double-Digit Rates,” Realtor.org, July 22, 2013.)
The S&P/Case-Shiller Index shows U.S. housing market … Read More
Signs of change in the U.S. housing market are already beginning to show. And homebuilders and development stocks like Brookfield Residential Properties Inc. (NYSE/BRP) and D.R. Horton, Inc. (NYSE/DHI) are becoming vulnerable. They have already shown some signs of weakness since the beginning of May, and more could follow.
There’s no doubt the housing market has seen a significant run. Home prices in the U.S. economy are increasing at a pace not seen since the housing market was booming. It’s hot; some institutional investors are even betting large sums of money on it and appear to think it will continue to grow at this pace.
But looking ahead, I can’t help but point out that there are some issues that can become troublesome for the already damaged housing market. You need to keep in mind that home prices are still down a great amount since their peak in 2006–2007.
Investors need to know about the most troublesome phenomenon occurring in the housing sector: rising mortgage rates.
If you look at Freddie Mac’s monthly average commitment rate on 30-year fixed-rate mortgages, it climbed to 4.07% in June, an almost 10.6% increase from a year earlier. The same mortgage rates in October 2012 stood at 3.35%—their lowest since 1971. (Source: “30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac web site, last accessed June 12, 2013.)
As the mortgage rates continue to go higher, many of those who are looking to buy homes now might get discouraged, and a decline in buyers creates a liquidity problem in the housing market. Remember, the housing market isn’t liquid like the stock market or foreign exchange markets, … Read More
When the financial crisis struck the U.S. economy, banks struggled. Giants like Lehman Brothers went into bankruptcy, while others were forced to merge. No matter where you looked, the financial system appeared to be in very poor shape. This phenomenon not only created havoc in the U.S. economy, but sent ripple effects into the global economy, as well.
In the midst of all this, when the financial systems in the U.S. economy were on the verge of collapse, our neighbor to the north, Canada, didn’t really experience anywhere near as much of a financial crisis.
The banking system in the country remained strong because the Canadian banks were not as exposed to the “bad assets” that were at the root of the U.S. banks’ problems.
During the financial crisis in the U.S. economy, Canada was one of the few G7 countries that were actually able to prosper. The Canadian dollar, compared to other major currencies in the world, increased in value. Take a look at the chart below:
Chart courtesy of www.StockCharts.com
In early 2009, the Canadian dollar was hovering around US$0.77; now, it trades at US$0.95—23.3% higher. In early 2011, and again later in the year, the Canadian dollar actually surpassed US$1.05.
But it appears that the Canadian dollar now faces some headwinds, which could drive it lower and hurt the trend it has been following since the financial crisis.
To begin with, the Canadian economy is slowing. This year, the Bank of Canada expects the country’s economy to grow at a slower pace than the previous year, expecting growth of 1.5%, compared to 1.8% in 2012. (Source: “Clouds … Read More
The American Dream has taken a beating over the past few years, after the housing bubble burst and the subsequent market crash. But that’s all in the past now—or so it seems. The idea of home ownership is back on the table for a growing number of Americans.
The Department of Commerce reported that new-home sales climbed 2.1% in May compared to April—the highest level since July 2008. While the sales of new homes (476,000) remain below the 700,000 annual rate that’s considered healthy, they’re still up 29% year-over-year. The median price of a new home sold in May was up 3.3% year-over-year, at $263,900. (Source: “New Residential Construction in May 2013,” U.S. Census Bureau web site, June 18, 2013, last accessed June 28, 2013.)
Keeping the optimism alive, the National Association of Realtors (NAR) said that more Americans signed contracts in May to buy previously owned homes than at any other time in more than six years.
Total existing-home sales in May were up 4.2% to a seasonally adjusted annual rate of 5.18 million versus 4.97 million in April. Total existing-home sales are also up 12.9% over the 4.59 million recorded in May 2012. The NAR noted that the strong growth is unsustainable unless new home construction starts increase by 50%. (Source: “Existing-Home Sales Rise in May with Strong Price Increases,” National Association of Realtors web site, June 20, 2013.)
The Standard & Poor’s Case-Shiller Index showed that existing-home prices in 20 U.S. metropolitan areas were, on average, 12.1% higher in April than a year earlier. San Francisco led the way at 23.9%, with Las Vegas a close second … Read More
The housing market in the U.S. economy has gained a significant amount of attention. Even my old friend, Mr. Speculator, who likes to make big bets for bigger gains, told me it’s a good time to buy a house, saying “the prices are cheap, and they are only going higher from here.”
What’s certain is that the U.S. housing market has seen an uptick since the home prices hit bottom in early 2012; but is it on the path to real recovery, or is what we are seeing just a minor bounce?
Consider the chart below of the S&P/Case-Shiller Home Price Index:
Chart courtesy of www.StockCharts.com
Looking at home prices alone, they are nowhere close to being at the same level they were in 2006 and 2007. The S&P/Case-Shiller Home Price Index suggests the U.S. housing market is still down roughly 26% from its peak.
Going forward, the very factors that can drive the housing market higher are under stress, and may just divert its path to the undesired direction.
The number of first-time home buyers in the housing market has been decreasing. This shouldn’t be taken lightly, because they essentially provide liquidity to the housing market. In May 2012, they accounted for 34% of all existing home sales in the U.S. housing market; by May 2013, they had declined almost 28%. (Source: “Existing-Home Sales Rise in May with Strong Price Increases,” National Association of Realtors web site, June 20, 2013.)
Unemployment in the country is staggering. Almost 12 million Americans are out of work, and a significant portion—37.3% of them to be exact—have been unemployed for more than six … Read More
The headlines are flashing: the housing market is in recovery mode. It isn’t very uncommon to hear that the real estate market in the U.S. economy is hot once again. No doubt, the reasons for all this optimism towards the housing market are pretty strong, as well.
The S&P/Case-Shiller index of home prices in the U.S. economy increased 10.9% from March of 2012 to March of 2013. This was the biggest increase in U.S. home prices since April of 2006. (Source: Woellert, L., “Home Prices in U.S. Rise by Most Since 2006 in March,” Bloomberg, May 28, 2013.) The chart below shows the change in the S&P/Case-Shiller index over the last eight years:
Chart courtesy of www.StockCharts.com
Similarly, the new-home sales data in the U.S. housing market showed better-than-expected results. According to the U.S. Commerce Department, new-home sales in April increased 2.3% to an adjusted annual rate of 454,000, compared to 444,000 in March. From the same period a year ago, new-home sales edged higher by 29% and new-home prices increased 15% in April of that year. Economists surveyed by MarketWatch expected the new-home sales number to be 430,000. (Source: Goldstein, S., “April new home sales up 2% to 454,000,” MarketWatch, May 23, 2013.)
Moreover, existing-home sales in the U.S. economy edged higher by 0.6% in April and registered an adjusted annual rate of 4.97 million, compared to 4.94 million in March. Compared to a year ago, existing-home sales were up 9.7% from April of 2012, when they totaled 4.53 million. (Source: “April Existing-Home Sales Up but Constrained,” National Association of Realtors web site, May 22, 2013.)
On top of … Read More
Thanks to the near-record-low interest rates, many Americans are ready to jump back into the housing market. Unfortunately, many are running into one obstacle—there aren’t enough homes for sale. That’s a good sign, though! After all, a leading indicator of economic growth is a healthy housing market, and a lack of housing should mean that builders can’t keep up with demand.
Part of the reason there is a lack of supply is that many people don’t want to sell. Many homeowners lost a lot of equity in 2006 when the housing market collapsed. Today, 21.5% of all residential homes in the U.S. are worth less than their mortgages. (Source: Panchuk, K.A., “CoreLogic: 10.4 million mortgages still in negative equity,” HousingWire.com, March 19, 2013, last accessed May 7, 2013.)
While housing prices have begun to rebound, they are still down 27.5% from their April 2006 peak. With that much room to grow just for homeowners to break even, you can see why many don’t want to unload their property, and why many first-time buyers are competing for a small number of homes. But homebuilders are stepping in to fill the void.
In 2013, U.S. homebuilders are expected to create one million homes, which will be the fastest pace at which homes were built since 2008. Apartment construction is leading the way, up almost 31% to an annual rate of 417,000, the fastest pace since January 2006. Single-family home building, which makes up nearly two-thirds of the market, fell almost five percent to an annual rate of 619,000. (Source: “New Residential Construction in March 2013,” United States Census Bureau web site, April … Read More
Reflecting the strength in the U.S. housing market, Weyerhaeuser Company (NYSE/WY) reported very good financial results in its first quarter.
The company’s 2013 first-quarter revenues leapt to $1.95 billion, way up from $1.49 billion in the same quarter last year, on solid demand from all its business lines.
Net earnings grew significantly to $144 million, way up from earnings of $41.0 million in the same quarter last year.
On the stock market, Weyerhaeuser is expensively priced, but it certainly is great to see this mature company reporting solid business growth.
Stocks related to the U.S. housing market have been on a tear for the last couple of years, but it is very much a sector that is chock-full of risk.
It is not a group of companies on the stock market that a conservative investor would want to use while saving for retirement.
The Home Depot, Inc. (NYSE/HD) is a component company in the Dow Jones Industrial Average and has been a powerhouse wealth creator recently.
On the stock market, Home Depot has doubled over the last 18 months, which is pretty spectacular for such a mature, large-cap company.
It is a reflection, however, of the enthusiasm that institutional investors have for the U.S. housing market and the resurgence that it is now experiencing.
Of course, there is no runaway bull market in housing, but the action in the stock market reflects a recovering housing market, as does the fact that earnings from housing-related companies are going up.
D.R. Horton, Inc. (NYSE/DHI) reported excellent growth in its latest quarterly revenues of $1.4 billion, up a spectacular 49%.
The company’s earnings … Read More
Not everyone thinks the U.S. economy is still in trouble. In spite of high unemployment, a decrease in consumer confidence, a drop in U.S. retail sales, and a downward revision of the U.S. gross domestic product (GDP) growth to 1.7%, there are a number of well-heeled economists predicting nothing but good times on the horizon.
According to a recent Bloomberg survey, GDP is expected to climb at an annualized rate of three percent in the first quarter, versus the projected two-percent gain in March and the 1.6% gain that was forecasted for this quarter in December. (Source: Torres, C. and Saraiva, C. “Economy Bears Turn Bulls Seeing 3% U.S. GDP Few Saw in 2012,” Bloomberg, April 12, 2013.)
Wall Street’s well-intentioned bankers are in agreement. Morgan Stanley’s chief U.S. economist, Vincent Reinhart, raised his estimate from 0.8% in December to three percent. Brian Kasman of JPMorgan Chase & Co. increased his forecast from one percent to 3.3%.
Why the exuberance? One of the leading indicators of economic growth, they maintain, is the healthy housing market. New home construction in 2013 is expected to total 970,000, up from 780,000 in 2012 and the largest number since 2007, just before the Great Recession. Existing home prices are also up; February prices were up 11.6% year-over-year, the largest increase since November 2005. (Source “Existing-Home Sales and Prices Continue to Rise in February,” Realtor.org, March 21, 2013.)
According to a Fannie Mae study, 48% of Americans think home prices will rise in 2013; only 10% think they will slide. (Source: “Consumers’ Positive Housing Attitudes Withstand Fiscal Concerns; Many Indicators Holding At or Near All-Time … Read More