Pending Home Sales Fall Unexpectedly The number of people signing contracts to buy previously owned homes unexpectedly declined in February, a sign the sector continued to struggle through unusually cold weather and rising mortgage rates.
The National Association of Realtors said Thursday its seasonally adjusted index for pending sales of existing homes dropped 0.8% in February from a month earlier to 93.9, its eighth straight month of declines. Economists surveyed by Dow Jones Newswires expected a 0.2% rise in pending home sales for February.
February’s reading was the lowest since October 2011, after hitting a recent peak of 110.8 in June. From a year ago, the pending-home-sales index was down 10.5%. An index of 100 is equal to the average level of activity during 2001.
Home sales were mixed across the country last month. In the South, sales fell 4.0% (-9.3% y/y) following a 3.1% January rise. Sales remained down 11.8% from the May peak. In the Northeast, a 2.4% decline (-7.4% y/y) pulled sales 14.4% below the peak last April. In the Midwest, sales firmed 2.8% (-8.5% y/y) following seven straight months of decline. Sales were off 15.5% since the May peak. In the West, sales gained 2.3% last month (-16.5% y/y), also after seven straight monthly declines. Sales were off by one-quarter from the peak. (Haver Analytics, including chart)
On a national level, listed for-sale inventory remains near historically low levels, though increased at a seasonally strong 6.4% m/m pace in February. (Raymond James)
Is there hope? KB Home saw strong traffic in February:
KB Home [KBH] Earnings Call 3/19/14: “January and February, sales and traffic were strong. In fact, our traffic was up dramatically in February over the prior year, a great indication that the spring selling season is well underway and also a pre-cursor of our future sales.”
Something not mentioned by Lennar:
Lennar Corp. [LEN] Earnings Call 3/20/14: “While we recognize the potential headwinds from a constrained and sometimes uncertain mortgage market, including
interest rate volatility, and sometimes volatile consumer confidence, and also diminishing investment purchasers in the resale market, we feel that the fundamentals
of short supply of available homes and pent-up demand will continue to define our strategy of land acquisition and growth and drive the recovery forward.”
As I wrote yesterday, continued weak mortgage applications in March don’t signal rising demand in the spring, a view supported by Moody’s:
Things may not soon warm up by much on the housing front. At the very start of housing’s peak spring selling season, the MBA’s index of mortgage applications for purchase for March 21 was down by -16.9% from a year earlier. For the comparably situated week of a year earlier, this indicator of prospective homebuying activity was up by +9.9% yearly.
US economy grew 2.6% in fourth quarter Slight upward revision after rise in personal consumption
A 3.3 per cent increase in personal consumption was the main driver behind the revision. However, investment in inventories and intellectual property products was weaker.(Chart from Doug Short)
The Next Problem: Too Much Profit America Inc.’s profit margins have hit another record. Be careful what you wish for.
The Commerce Department on Thursday released data on corporate profits. Once again, these showed that income for U.S. businesses is growing at a faster rate than the economy. With after-tax profits up 4.8% in the fourth quarter from a year before and gross domestic product up 4.1% unadjusted for inflation, profits as a share of GDP—an economy wide proxy for corporate margins—hit a new record of 11.1%. If the measure was back at the average of 5.4% that prevailed in the 1990s, profits would be half what they are now.
Analysts expect margins to keep expanding, estimating that profits for S&P 500 companies will grow by 7.4% this year even as sales expand by just 3.8%, according to S&P Capital IQ. That could be a dangerous forecast—not so much because companies might not be able to meet it but because of what they might be doing to try to do so.
Chief among the factors contributing to profit-margin expansion is the tight lid companies have put on costs. They have been slow to hire and slow to raise wages. Inflation has outpaced gains in private-sector employee compensation over the past five years, according to the Labor Department. Spending on new equipment has been muted, too. Aggregate capital expenditure for members of the broad S&P 1500 index has grown by just 0.8% annually over the past five years, according to S&P Capital IQ.
Low rates have allowed many companies to refinance debt, cutting interest costs. The effective yield on investment-grade corporate debt, according to the BofA Merrill Lynch Corporate Master index, is now 3.1%, versus 5.8% in December 2007.
Taxes have been low as well, in part as companies offset them with losses taken during the recession. Income statements from companies in the S&P 500 showed an effective tax rate, including state and local taxes, of 29% in 2012 versus 32% in 2007, according to ISI Group’s David Zion. He calculates that their cash tax rate—what they actually paid—was 25% in 2012, against 31% in 2007.
For greater details on rising margins: CHINESE ROULETTE
Senate Clears Hurdle to Extend Jobless Benefits The Senate on Thursday voted 65-34 to begin debate on a new bipartisan agreement extending unemployment insurance for five months.
(…) The bill under consideration in the Senate would retroactively restore jobless benefits for the roughly two million unemployed people who had lost them in late December.
To ensure the benefits’ roughly $9.9 billion cost doesn’t add to the federal budget deficit, the bill contains provisions to raise revenue, including a “pension smoothing” provision from a highway bill set to phase out this year, which would allow employers to postpone contributions to employee pension plans.
Broken Deals in China Roil Markets Chinese importers of soybeans and rubber are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world’s second-biggest economy.
The U.S. Department of Agriculture confirmed that China has canceled orders for 517,000 metric tons of soybeans, used to make cooking oil, and compares to imports of 63.4 million tons last year. South American soybean contracts have also been canceled because of weak demand, says trade journal Oil World. (…)
Natural rubber, mostly grown in Southeast Asia and used to make products ranging from tires to latex gloves, is also getting hit as some buyers from China refuse to honor existing agreements, or look for ways to negotiate discounts. Two large Asian rubber producers, who asked not to be named, said Chinese buyers had defaulted on them.
Traders say buyers are trying to ask for discounts, citing reasons such as cargo arriving a few days late and claims about poor quality or contamination, said Bundit Kerdvongbundit, vice president of Von Bundit Co., Thailand’s second-largest natural rubber producer. The contracts are already signed, but Chinese importers “refuse to take cargo or pay unless they get discounts.” (…)
Rubber prices have dropped more than 20% since the beginning of the year, due to worries over China’s slowing economy and a global surplus of the commodity. Many sellers who bought at high prices are unwilling to sell at a loss, pushing up stocks at the port of Qingdao to near-record levels recently. Stockpiles in some other commodities like soybeans and iron ore are also high as buyers hang on. (…)
Preliminary data from Spain showed consumer price deflation for the first time since 2009 in March. Regional German figures showed a slowing pace of inflation, stoking expectations that the rate for the euro zone as a whole—due Monday—will drop further below the ECB’s target.
The 0.2 percent annual decline in Spanish consumer prices this month was larger than expected, the weakest figure since October 2009, and enough to push Spanish 10-year government bond yields to a new eight-year low.
Russian Border Buildup Stokes Worries Russian troops massing near Ukraine are actively concealing their positions and establishing supply lines that could be used in a prolonged deployment, ratcheting up U.S. concerns.
(…) “There is a significant tail risk that’s growing for the world economy,” said Sinai, chief executive officer of the New York-based consultant. He sees a 10 percent chance of a global recession triggered by escalating tensions between Russia and the U.S. and Europe over Ukraine. (…)
El-Erian, chief economic adviser to Munich-based Allianz, said in an e-mail he is sticking with his prediction that worldwide growth will pick up this year. What’s changed is a greater chance there won’t be any acceleration, he said.
Fels and his team at New York-based Morgan Stanley agree, saying in a March 16 report that the risks to their forecast of 3.4 percent growth this year “are generally tilting to the downside.” The world economy expanded 3 percent in 2013. (…)