A One-Pillar Economy

Despite blockbuster new home sales, higher interest rates have put downward pressure on housing activity. This is highly worrisome given the importance of housing to the health of the U.S. economy.

July 24, 2013   |    By Scott Minerd, Global CIO


With new home sales rising in June to their highest level in five years, at an annualized pace of 497,000 homes, there will be plenty of headlines declaring that the U.S. housing market is healthy. While Wednesday’s headline housing number will without doubt be viewed by many as surprisingly positive, the overriding trend remains negative. The most important variable in the U.S. economic environment is the negative impact of higher interest rates on mortgages and the real estate market, which lately has made the United States a one-pillar economy. The yield on 10-year U.S. Treasuries has risen by 95 basis points since the start of May and we have already seen a negative trend reflected in most housing data. Mortgage applications, housing starts, and permits are all down. Loan requests for home purchases, a leading indicator of home sales, fell in the latest week. Lower mortgage applications today mean investors can expect a drag on home sales in the near future. Total mortgage applications, which include purchases and refinancing, are also down for the sixth consecutive week. Crucially, existing home sales (which account for more than 90 percent of all sales) contracted 1.2 percent in June. While the latest new home sales number was certainly a blockbuster, it is worth remembering such sales only account for 8.4 percent of total U.S. home sales. So while new sales were strong in June, when combined with sales of existing houses, overall sales actually declined 0.4 percent from May. Interest rates for mortgages fell for the first time in two-and-a-half months after U.S. Federal Reserve Chairman Ben Bernanke sought to downplay expectations that the central bank will taper its asset purchases. Still, fixed 30-year mortgage rates, now at 4.58 percent, are well above the 3.59 percent rate that was available at the start of May. Dr. Bernanke and his fellow Fed presidents can use their speeches to try hard to slow interest rates from their inevitable rise as markets reflect expectations that the central bank will start to taper its quantitative easing at some point over the next year. But, as I have noted before, they will find it is hard to put the toothpaste back in the tube. It will be nearly impossible to ascertain the full impact of rising interest rates on housing until late August or September because of the time lag between rising rates and the impact on the data. During this time, investors will be well served by focusing on what is likely to happen further out on the horizon, as well as on the sheer importance of housing for economic growth. Housing remains the primary pillar supporting growth in output in the United States, so if activity in this market continues to teeter – and this means a mere flattening in activity, not a crash – the rest of the economy will face major problems.

 

Plunging Housing Starts May Slow GDP Growth

U.S. housing starts posted a monthly decrease of 9.9 percent in June. In the second quarter, housing starts fell 8.9 percent from the prior quarter, the largest drop since the first quarter of 2009. The decline in starts could add more downward pressure on U.S. real economic growth. History suggests that depressed Q2 housing starts should translate into a 0.6 percent drag on annualized real GDP growth during the same period.

U.S. HOUSING STARTS VS. CONTRIBUTION TO REAL GDP GROWTH FROM RESIDENTIAL INVESTMENT

CUMULATIVE NYSE ADVANCE/DECLINE LINE AND THE DOW JONES INDUSTRIAL AVERAGE

Source: Bloomberg, Guggenheim Investments. Data as of 6/30/2013.

Economic Data Releases

Mixed Signs in Home Sales

Europe PMIs Indicate Expansion as Confidence Improves, China Slows Further

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.


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