Conference Board Leading Economic Index Increased in April
The index rose 0.4 percent to 101.4 percent. March was revised up 0.1 percent the two previous months were revised down 0.1 percent (2004 = 100).
No signs of recession yet.
U.S. HOUSING
Existing-Home Sales Rise
Sales of existing homes rose 1.3% in April to a seasonally adjusted annual rate of 4.65 million, the National Association of Realtors said Thursday. That was slightly lower than a 4.68 million rate forecast by economists surveyed by The Wall Street Journal and was 6.8% lower their year-ago level.
The uptick followed a rise in the trade group’s March tally of pending home sales, which typically precede existing home sales by one or two months and signaled a rebound for the sector after a harsh winter. The coming months are crucial for the U.S. housing market because families traditionally prefer to move to a home in a new school district by the end of the summer.
Existing home sales were down Y/Y for the sixth straight month. Inequality is obvious in the housing market:
Sales of move-up and luxury homes continue to outperform the composite national trends in April. While overall home sales were down 6.8% y/y, sales of homes priced between $500,000-1,000,000 increased 0.8% y/y and sales of $1+ million homes increased 5.2% y/y. In total, these segments account for 11.5% of the market. Meanwhile, sales of homes under $250,000 (representing 61.4% of the market) fell 7.2% y/y. Importantly, 32% of all sales in April were “all-cash” transactions (normally less than 10%, down from 33% in March), indicating that investors and other affluent households still remain a critical component of current housing demand. (Raymond James)
Interestingly,
April listed inventory increased 16.8% from the prior month to 2.29 million for-sale homes (up 6.5% y/y). We note that the historical March-to-April inventory patterns show average listings typically fall 0.1% (dating back to 1990).
To be monitored. Meanwhile, more on inequality in housing:
Why Housing Isn’t As Cheap as It Looks
(…) The National Association of Realtors’ housing affordability index shows that housing is still more affordable than anytime between the early 1990s and 2008. What’s not to like?
The problem is that this picture of affordability assumes borrowers have down payments of at least 20% and that they’re able to qualify for the lowest mortgage rates. A new analysis from Goldman Sachs shows that for marginal borrowers, including many first-time buyers, the picture of affordability is only so-so. (The Journal raised a similar point in an Outlook column this past March.)
May I humbly say, just for the record, that I wrote about this in June 2013 (Facts & Trends: U.S. Housing A House Of Cards?)…
“While focusing on the median family is one way of gauging housing affordability, another way is to focus on the marginal buyer who is arguably more relevant for determining house prices,” write Goldman economists Marty Young and Hui Shan. “Put differently, the prices that we observe should be determined by how much the marginal buyer is willing and able to pay.”
Marginal borrowers differ from the median borrower in two key ways: Their incomes aren’t as strong, and their credit isn’t as good.
To the latter point, many marginal borrowers are taking out loans backed by the Federal Housing Administration, which allows down payments of just 3.5% and where lenders are more willing to approve borrowers without perfect credit scores. The FHA, however, has repeatedly raised the insurance premiums that borrowers must pay, which means mortgage rates for these borrowers are higher than those used to gauge affordability for the market as a whole.
FHA policies, in other words, have raised financing costs for first-time homebuyers relative to what borrowers with larger down payments would find in the market. While the average 30-year fixed-rate mortgage stood at 4.47% in February, the effective rate paid by FHA borrowers, once premiums and other costs are baked in, stood at around 5.65%, according to Goldman.
The NAR index shows that homebuyers’ monthly mortgage payments account for less than 15% of their monthly income—putting housing affordability at very favorable levels. But Goldman constructed a separate index to measure affordability for marginal buyers, and it found that the payment-to-income ratio is closer to its historical average of 23%. In other words, housing isn’t a screaming deal for marginal buyers, which could go a long way toward explaining their absence from the housing market right now.
This next chart shows a similar picture. While housing affordability has improved recently for the market as a whole, it’s actually gotten worse for marginal buyers.
The Goldman analysts don’t think the NAR’s index is wrong. “Different measures simply answer different questions,” they write. And using an index that focuses on marginal buyers shows that “housing is not as affordable as it looks.”
Canada: Sales of high-end real estate soaring
CHINA HOUSING
What China Property Crash? Economists See Growth Bump
China’s biggest homebuilding slump in at least four years isn’t enough to dissuade a majority of economists from predicting real estate will still contribute to 2014 growth. Property controls will be eased, they said in a Bloomberg News survey.
While 12 of 18 economists say China has some national oversupply of housing, only seven say the market is in a bubble state countrywide, according to the survey conducted from May 15 to May 20. Half see bubbles in some cities, and a majority says the loosening of restrictions on home purchases and loans will be limited to a regional level. (…)
Five of 17 respondents said the property market will make a net contribution to growth this year of 1 to 2 percentage points, while four said it would add less than 1 point and one analyst projected more than 2 points. Four people said there would be a drag of 1 to 2 points and two projected a subtraction of less than 1 point.
Next year, 10 economists see a net contribution to growth, while five expect a drag.
The nation’s housing market won’t crash like that of the U.S., Japan and Hong Kong, the official Xinhua News Agency said in an article published May 21 that called people forecasting such an outcome “doom mongers.” China will have strong housing demand because of continuing urbanization, speculative buying is less prevalent than it was in Hong Kong and mortgage debt as a proportion of GDP is lower than it was in the U.S., Xinhua said. (…)
While a majority of respondents said China has an oversupply of housing, three said the current national supply is in balance with demand, even if some cities are facing issues, while two said the current supply is too small to meet demand.
Not everyone is optimistic. Moody’s Investors Service this week revised its credit outlook for Chinese developers to negative from stable. Ren Zeping, a researcher at the State Council’s Development Research Center, said economic growth may slow to about 5 percent in two to three years, the state-run Shanghai Securities News reported yesterday. (…)
From the FT’s Lex column:
(…) Double the amount of land has been sold within China in the past three years than in 2007, 2008, and 2009 – when China’s local governments financed one of the great fiscal stimuluses in history with the proceeds. No stimulus in sight now; just urban residential floor space under construction of 5.7bn square metres at the end of 2013, five times annual sales.
These figures are perturbing. Goldman, which sees a two-year property downturn, thinks that volumes will drop 15 per cent, with a fifth of book value destroyed in developers. Scary? Yes.
But the trigger of the downturn may well be liberalisation of interest rates. As investment opportunities that pay market rates within China (hello, Yu’e Bao) grow, property loses its former cachet. Bad for small and unlisted developers who rely on domestic funding. Indifferent for listed ones that finance overseas: China Overseas Land borrowed US dollars for 6 per cent for 10 years last month. It trades at 1.4 times book; Goldman thinks the sector may trough at 1 times. But the top 20 developers have only a fifth of the market in China – or markets, given over 200 cities.
Hmmm…not good for China’s overall economy, a big part of which is tied to housing trends. And what about hard commodities? 
Li is getting more worried:
China says economy faces pressure, policy fine-tuning needed
China’s economy still faces “relatively big” downward pressures and timely policy fine-tuning is needed, Premier Li Keqiang was quoted by state radio as saying on Friday.
“Currently, the economy is generally stable and we see positive structural changes, but downward pressures are still large and we cannot be complacent,” Li said during a visit to the northern region of Inner Mongolia.
“We should use appropriate policy tools and pre-emptive fine-tuning in a timely and appropriate manner to help resolve financing strains for the real economy, especially small firms’ difficulties in financing and high borrowing costs,” he said.
Such policy fine-tuning should help maintain “reasonable growth” in money supply and bank credit, he said.
World Trade Flows Fall World trade flows fell in the first three months of 2014, another indication that a sustained and broad-based pickup in global economic growth remains out of reach more than five years after the start of the financial crisis.
The Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Friday said the volume of world exports and imports in March was 0.5% lower than in February. For the first quarter as a whole, trade flows were down 0.8% on a quarterly basis, after a rise of 1.5% in the final three months of last year.
During the first quarter, exports from developing economies in Asia recorded the largest decline, a drop of 4.5%. Central and Eastern Europe was the only region to record a rise in exports.
Asian developing economies also recorded the largest drop in imports, while Japan recorded what the CPB termed “a remarkable increase,” or a jump of 4.5%. That was likely linked to high levels of consumer spending ahead of an April increase in the country’s sales tax, which also boosted economic growth during the period.
According to the CPB, exports from and imports to the U.S. also fell during the quarter, while trade flows to and from the euro zone were little changed. (…)
SENTIMENT WATCH
It Is Really Quiet Out There Summer doldrums have arrived early on Wall Street. Major U.S. stock indexes have barely budged this month, fear has nearly vanished from the markets and few are anticipating anything to significantly change anytime soon.
Traders cite a financial outlook that is widely perceived to pose little risk of an economic or market downturn: near-record stock prices, low interest rates, steady if unspectacular U.S. growth and expansive if receding Federal Reserve support for the economy and financial markets. (…)
Over the past three months, the S&P 500’s spread between its intraday high and intraday low is less than 5%, the narrowest trading range since October 2006, according to Bespoke Investment Group. Since 1984, there have only been six other instances in which the S&P 500 has traded in such a narrow range over a three-month period. (…)
And the CBOE’s Volatility Index, or VIX, dropped to as low as 11.68 Thursday, a 14-month low. The market’s so-called fear gauge is calculated from the prices investors are willing to pay for options tied to the S&P 500.
The VIX, which is widely viewed as a proxy for the stock market’s capacity for sudden spikes and plunges, remains well below its long-run average of around 20.
I don’t know about your neck of the woods but it ain’t looking like summer here just yet… And it’s not so quiet in other parts of the world: Putin Says Ukraine in Full-Scale Civil War Before Vote