Yesterday’s latest release of new home sales renewed talk that the much-discussed slowdown in housing has been greatly exaggerated. Don’t believe it. A cooling of the property market is unfolding. What’s debatable is the type and degree of aftershocks that will accompany the slowdown. On that, at least, there’s reason to pare one’s fears, if only slightly.
Yes, the May data for new sales of single-family homes for last month posted an unexpected pop, the U.S. Census Bureau reported yesterday. What’s more, the gain in May not only exceeded the consensus forecast; it was also the third straight month of higher sales, as the chart below illustrates.
But lest one thinks it’s time to rethink the notion that the real estate market is defying gravity, consider the broader perspective.
For starters, the number of homes sold dropped by 5.8% to 1.23 million, as of last month relative to a year earlier. Over the same period, the number of houses for sale jumped by nearly 24% to 556,000. More houses for sale and fewer sales. You don’t have to be an expert in property management to take the hint of what’s coming.
What’s behind the rise in the supply of houses for sale while the number of homes sold has dropped? Perhaps it’s the fact that mortgage rates are rising, making it more financially burdensome to buy homes. The standard 30-year fixed-rate mortgage was 6.83% last week–the highest in more than four years, according to a survey by Bankrate.com. The Fed seems inclined to keep that rate moving higher, insuring that the relative allure of real estate will wane further.
For the growing number of households with variable-rate mortgages, higher rates pose a more direct threat. As David Kotok of Cumberland Advisors notes in an email note to clients, “$1 trillion in mortgages reset higher this year. $1.7 trillion next year. When mortgage interest rates rise and impact over 10 million households in two years, you must get a slowing.”
The mindset that expects a slowdown in real estate and beyond finds a nurturing home at
Lombard Street Research, a macroeconomic forecasting outfit that monitors the data from London. Last week, Lombard analyst Gabriel Stein warned that raising Fed funds beyond the 5.25%-to-5.50% range “would be a mistake.” Fearing that inflationary momentum is gaining traction, the Fed might elevate rates above 5.50%, Stein muses. But inflation is a backward-looking indicator, he reminds. In addition, the rate of increase in the U.S. money supply, measured by M2, has slowed sharply recently, he adds. The latter is a more reliable indicator of future inflation, as per the monetarism of Milton Friedman. The bottom line: “the U.S. economy is headed for a slowdown,” Stein wrote, and the Fed looks set to insure that outcome, albeit by way of erroneous rear-view mirror analyses.
Meanwhile, to return to the property market, if the economic slowdown turns on the pace and degree of real estate’s cooling, what are we to infer from the mini boom underway in home sales? The optimistic view is that any property correction will be of the soft-landing variety, helped by growth elsewhere in the economy, as one analyst opines.
Don Luskin, chief investment officer of TrendMacrolytics, is a leader among the optimists on this score, pointing out in a note to clients yesterday that the slowdown fears on Wall Street are overdone. “As the conventional wisdom once again embraces the idea that the economy is headed for a sharp slowdown,” Luskin wrote, “one of the most reliable indicators of future economic performance is saying ‘full speed ahead.’ Consensus bottoms-up forward earnings for the S&P 500 are surging forward, seemingly oblivious to the slowdown that is supposedly just around the corner. They’ve been surging steadily over the last three years, while a bull market in stocks and a roaring economy have climbed a classic wall of worry.”
Right or wrong, informed or ignorant, the Fed will raise rates again at this week’s FOMC meeting. Deciding if that proves enlightened remains a battle of import among the bulls and the bears. The strategic war is still up for grabs, but the risks that naturally accompany being wrong are still a clear and present danger.