HOUSING
Homeownership rate down but vacant dwellings also falling
According to just-released data, the homeownership rate in the U.S. declined to 63.4% in Q2, its lowest level since 1967. As today’s Hot Charts show, the weakness is not limited to the youngest cohort which has been particularly hit by the deterioration of the labor market during the last recession. All other age groups reached a multi-year low in Q2 perhaps a legacy of the 2008-2011 housing crash (which hurt confidence or changed preferences) and tighter lending standards.
That said, not everything is bleak in this report. Household formation (all renters in Q2) resumed its upward trend pushing down the vacancy rate in the rental market to a 30 year low, while the homeowner segment was also down approaching its historical average. Which such low level of vacant dwellings, the stronger labor market and the U.S demographic profile, housing starts could easily improve to a pace of 1400K annualized units (was 1174K in June) over the coming years. (NBF)
“Easily” at the low point? (Chart from Doug Short)
Maybe yes, as rents are rising fast:
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Rising Rents Outpace Wages in Wide Swaths of U.S. The cost of renting a home is rising faster than wages across wide swaths of the country, a problem that has become especially acute in the past year, putting a big squeeze on many household budgets.
The situation is particularly noticeable in long-pricey areas across the West and in big cities like New York, where the average household pays more than 40% of its gross income for rent, according to online real-estate database Zillow. But rising prices also have spilled over into cities like Denver, Atlanta and Nashville.
Much of the problem is attributable to simple supply and demand. The job market has improved and millennials are entering the labor pool in force, boosting household formation. But in a structural shift for the real-estate market, new households are much more likely to be renters than buyers. (…)
In the first quarter of 2015, the number of U.S. households was up by almost 1.5 million from a year earlier, the second consecutive quarter of relatively strong growth following years of only tepid gains.
But the net increase was entirely due to renters, while the number of owner-occupied households fell slightly. That’s broadly been the case since the housing bust, with new household formation consistently coming from renters rather than buyers. (…)
From 2003 to 2013, the share of renters aged 25 to 34 who are considered cost-burdened increased from 40% to 46%, according to a recent report by Harvard University’s Joint Center for Housing Studies. (…)
MPF Research, which tracks occupancy and rental rates, found second-quarter rents rose 5.2% from a year earlier nationwide, a 15-year high. (…)
Maybe no, as house prices have risen even faster…
The S&P/Case-Shiller Home Price Index, covering the entire nation, rose 4.4% in the 12 months ended in May, slightly greater than a 4.3% increase in April.
The 10-city and 20-city indexes saw similar increases in May as in April. The 10-city index gained 4.7% from a year earlier, slightly stronger than a 4.6% increase in April. The 20-city index gained 4.9% year-over-year, identical to the increase in April.
After seasonal adjustment, the national index was unchanged and the 10- and 20-city composites were both down 0.2% over the month. Ten of the 20 cities in the index reported month-over-month decreases in prices, after seasonal adjustment. (chart from CalculatedRisk):
…and first-time buyers are skittish (chart from Ed Yardeni)…
…perhaps explaining that mortgage apps remain weak (chart from CalculatedRisk)…
…even with record low mortgage rates?
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How Much Do Homebuyers Care About Interest Rates?
- Add this (from The Urban Institute)
It’s a common belief that rising interest rates are bad for the housing sector. The Federal Reserve Bank of New York recently decided to test the validity of that notion by asking people how much they would be willing to pay if they were forced to buy a home comparable to their current one. The researchers also gave respondents access to calculators that showed the monthly payments they would incur if they bought a house for a certain price at a certain mortgage rate.
On average, the amount people were willing to pay dropped just 5 percent in a scenario where mortgage rates rose from 4.5 percent to 6.5 percent.
Down payment requirements, however, had a much larger effect. When respondents were told they had to put just 5 percent down on their hypothetical new home, they were willing to pay 15 percent more than when they were required to put 20 percent down. Renters were willing to pay 40 percent more for a home if they only had to make a 5 percent down payment.
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Rental Demand Supplies Home-Building Opportunity
Why will the overall homeownership rate continue to fall in 2020 and 2030? Possible contributors include the following:
Hispanics and blacks have lower homeownership rates than whites, and both groups are growing as shares of the population. But changes in racial/ethnic and age composition alone do not account for the drop in the homeownership rate..
Real wages have been very flat since 1996, and have actually declined among adults ages 25–34. This stagnation makes it much harder for people at any age, particularly the young, to save enough for down payments. Even for young adults with good jobs, low vacancy rates and high rents make it more difficult to save.
Student loan debt has increased from about $300 billion in 2003 to over $1.3 trillion in 2014.
In June, ground was broken on the most multifamily-housing units since 1986. Meanwhile, the number of permits issued for units that construction hasn’t been started on yet also has swelled.
Banks have eased lending standards and as of mid-July had a seasonally adjusted $1.7 trillion in commercial real-estate loans outstanding. That is up 9% from a year earlier. Moreover, the housing market looks as if it is loosening up; this year’s spring selling season was the best since 2007. So many renters may soon become owners.
U.S MANUFACTURING: Fed Surveys vs ISM vs Markit
We now have 4 of the 5 regional Fed bank manufacturing surveys for July and all four are in contraction mode, setting the stage for some nervousness when the ISM is released next Monday. Mind you, Markit’s flash U.S. manufacturing PMI rose to 53.8 from 53.6 and was accompanied with statements like
- solid improvement in overall business conditions across the manufacturing sector
- stronger rises in output and new business levels in July
- strong rise in incoming new business, with the rate of expansion picking up to its fastest for three months
- survey respondents cited improving domestic economic conditions and a general upturn in client demand
- July data nonetheless indicated a marginal rebound in total new work from abroad
Markit’s preliminary survey was unequivocally pointing up, contrary to the four Fed surveys. Interesting.
The warning signs of trade stagnation (Stephanie Flanders, chief market strategist for Europe, JPMorgan Asset Management)
(…) The latest World Trade Monitor showed the volume of world trade falling in May by 1.2 per cent. It slid in four out of five months in 2015 and risen just 1.5 per cent in the past 12 months — less than the growth in global output and far below the long-term average of about 7 per cent a year.
The problem has been getting worse for some time. Trade bounced back fairly well in 2010 after the global recession but it has disappointed ever since, growing by barely 3 per cent in 2012 and 2013. Now it seems the world cannot manage even that.
(…) structural forces can explain why trade is growing more slowly — they cannot explain why it is barely growing at all.
In fact, there are three more short-term explanations for the weak trade numbers, which should demand the attention of policymakers.
The first is that global investment demand continues to fall short. For several years, emerging market economies bucked the trend but capital spending has now slowed in such countries as well. This translates into lower trade growth because capital goods are more trade-intensive. It matters because it does not just dampen growth today but could also limit growth in the future by further slowing growth in productivity.
Another warning from the trade data is that the recovery in domestic demand in the US and Europe this year is not being seen elsewhere. Latin America appears to have contracted between the end of March and the beginning of July, and JPMorgan estimates that Asian emerging market economies — excluding China — grew by just 1.4 per cent. China is doing better but not nearly as well as it was. This weakness is worrying at a time when many governments in such countries have less room to ease policy than they did before and are already dealing with weak commodity prices and a stronger dollar.
Last weekend, Beijing announced new measures to revive demand through stronger exports — including a slightly more flexible currency. I doubt the Chinese authorities are about to engineer a big depreciation in the renminbi when they are also trying to develop its role as a reserve currency, and Chinese companies have borrowed so much in dollars. But the pressures are clearly there.
That highlights the final lesson: in today’s global economy, governments should not be trying to reflate their economies on the back of a weak currency alone. Since coming to power in 2012, Shinzo Abe, the Japanese prime minister, has done much to help his country’s economy, but one thing Abenomics has not accomplished is to increase exports. Many European policymakers think the weak euro has been the making of the eurozone recovery. But it has not yet. Net trade made a negative contribution to eurozone growth in the first three months of 2015 and trade’s contribution is likely to be barely positive for the rest of 2015.
For all the talk about the euro, the single most encouraging aspect of Europe’s recovery since the turn of the year has been the strength of domestic demand. But private capital investment in the eurozone is still flat and has been even weaker than in the US since 2010.
If consumption and investment firm up on both sides of the Atlantic, we should start to see global trade pick up as well. But policymakers should not kid themselves that trade is going to rescue them from their domestic economic travails, as it did in the past.
VW Lowers Sales Forecast as Russia, South America Falter
Volkswagen AG lowered its global sales forecast for this year amid growing concern among automakers about the slowdown in China, the world’s biggest car market.
Deliveries will be about at the 2014 level, the Wolfsburg, Germany-based carmaker said Wednesday in a statement that also cited challenging markets in Russia and South America. It had previously forecast a moderate increase in vehicle sales this year.
VW’s deliveries in China dropped for the first time in a decade in the first half. The year is shaping up to be no better for the industry as a whole, as China’s economic slowdown and volatile stock market coincide with curbs on auto registrations in some areas. Carmakers may see Chinese sales drop for the first time since 1998, Ford Motor Co. said Tuesday. (…)
PSA Peugeot Citroen, Europe’s second-biggest carmaker after VW, also cited the tough market in China when it reported results today. Despite more than tripling its first-half earnings, the French company didn’t raise earnings forecasts. Chief Executive Officer Carlos Tavares pinned that on an “unstable international environment,” and the company said it’s focusing on how to adapt to the steep slowdown in China.
Gavyn Davies What the leaked Fed forecasts tell us
(…) the economic staff’s projections indicate a worryingly pessimistic view of the supply side of the US economy, with only a small output gap at present, and very low productivity growth in the future. If validated by future data, this pessimistic view will involve a much lower medium-term growth rate for the US economy than has generally been assumed by official and private economists, and eventually that might start to worry the equity markets.
It also has implications for the likely path for interest rates. In the near term, a smaller margin of spare capacity in the economy might require higher policy rates in order to slow the economy and avoid inflation. In the longer term, however, a permanently lower gross domestic product growth rate is likely to involve lower equilibrium interest rates in the economy. The markets seem more convinced by this latter factor, which is why they are pricing a much lower path for policy (or short) rates than is implied in the FOMC’s dots charts.
But have they now found an unexpected ally in the shape of the Fed’s own economics staff? The answer is yes — the staff expects a much lower path for equilibrium interest rates in the next few years than the FOMC, and this translates into a much slower path for monetary tightening, especially in the years up to 2017.
(…)
The conclusion, therefore, is that the FOMC is almost 100 basis points (1 per cent) more hawkish on rates than its staff in 2017, about two-thirds of which is due to a difference in the equilibrium interest rate assumed by the two parties. The gap diminishes to only 30 basis points by 2020.
This means that the staff is much closer to the markets’ dovish view in the next two to three years than it is to the FOMC’s officially stated path for “appropriate” policy. The reason (presumably) is that the staff believes that the “headwinds” that are holding down the equilibrium rate will fade away more slowly than the FOMC expects.
Ultimately, it is of course the FOMC, not the staff, that matters for policy. In the run up to this week’s policy meeting, the key members of the FOMC have seemed fairly determined to announce lift off in September. But, after that, it is debatable how far they will push their hawkish view of the appropriate path for the equilibrium rate, when they have both the markets and their own economics staff against them.
CHINA
China is becoming very messy. Investor confidence is clearly broken. Beijing is tripping over itself in trying to arrest the rout. The economy is slower and slower. The Party is showing no leadership and looks more and more desperate.
China Business Cycle Index (NBS) collapsed to 60.7 in June, well below its 2009 low of 72. ISI’s company survey of China sales keeps falling.
EARNINGS WATCH
- 237 companies (60.5% of the S&P 500’s market cap) have reported. Earnings are beating by 6.1% (5.6% last Monday) while revenues have positively surprised by 0.2%.
- The beat rate is 75%. Ex-Financials: 78%.
- Expectations are for revenue, earnings, and EPS of -3.7%, -0.2% (-1.0%), and +1.1% (+0.3%). EPS growth is on pace for 3.5% (2.9%), assuming the current 6.1% beat rate for the remainder of the season. This would be 8.4% (7.8%) on a trend basis (ex-Energy and the big-5 banks).
Almost two-thirds of the way in terms of market cap and the earnings picture keeps getting better. Ex-Energy and Big Banks, trend earnings are running at a 8.4% pace YoY.
RBC Capital calculates that domestically sensitive companies have so far reported earnings growth of 9.0% while globally oriented companies’ earnings are up only 0.8%. Remarkable given the slow growth in the U.S. economy. In fact, domestic companies are showing revenue growth of only 1.7%, 0.6% below expectations as 50% have missed revenue estimates. Question is: how sustainable is this earnings trend given the weak top line growth?
Buybacks are clearly helping. S&P calculates that 72% of the companies that had reported last Thursday had a lower share count than last year (67% during Q1’15) and 22% had 4%+ lower shares YoY.
This is from Factset last week:
EARNINGS, OIL AND THE DOLLAR
The blended earnings growth rate for the S&P 500 (ex-Energy) for Q2 2015 is 4.1%. For companies (ex-Energy) that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 8.3%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the blended earnings decline is -0.2%.
The blended sales growth rate for the S&P 500 (ex-Energy) for Q2 2015 is 1.8%. For companies (ex- Energy) that generate more than 50% of sales inside the U.S., the blended sales growth rate is 3.5%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the blended sales decline is -2.1%. (Factset)
Liquidity worries reach US Treasuries Bond funds face spike in redemptions as rates increase
(…) Some fear that bond funds will be at the mercy of their clients, facing severe redemptions as rates increase, forcing them to liquidate portfolios to return clients’ cash. Most hold a float of liquid assets, such as US Treasury bills and other types of short-term debt, for this purpose. But a stampede for the exit could see many asset managers needing to sell at the same time, leading to volatile movements in prices. (…)
At the centre of the rapid evolution taking hold is the retrenchment by banks across fixed income, altering the traditional relationship between dealers and their clients.
Primary dealer holdings of high-grade debt, including Treasuries, mortgage-backed securities and corporate bonds, has fallen from $524bn at the end of 2007 to $170bn today, according to data from the Federal Reserve.
Anecdotally, traders say they used to step in during volatile price swings to help clients, with the aim of securing more business for when markets were calm. It was part of the client relationship. As banks have reduced balance sheets and declining fixed income revenues, the incentive to step in during market turmoil has been reduced. (…)
Saudis Expand Price War Downstream
The undisputed king of oil and gas is making some moves that could change the face of the global refining sector.
(…) As if being the world’s biggest exporter of oil was not enough, the desert kingdom is now looking to conquer the refining sector as it has quickly become the fourth largest refiner in the world. (…)
A refinery’s success is measured by its ‘gross refining margins’. The gross refining margin is nothing but the difference between the value of the refined products and price of the crude oil. In case of Saudi Arabia, the price of crude oil would be extremely low. “The crude is so cheap it’s pretty much free for them, the margins are going to be massive. It makes trade flows in products very different,” said Amrita Sen of Energy Aspects.
There is little doubt then as to why the Saudis are shifting their focus to domestic refining. Along with acquiring a controlling stake in Korea’s S- Oil, the desert kingdom is commissioning a new refinery in Jizan which would have a capacity of around 400,000 barrels per day when it begins operations in 2017. Jizan will come on top of Saudi Arabia’s two other 400,000 bpd- refineries at Yasref and Yanbu, and will turn the country into a major global player in the downstream sector, expanding its campaign for market share beyond just crude oil.
By offering almost 2.8 million barrels of low-sulphur diesel to Asian and European markets, the Saudis are directly competing with Asian refiners, potentially sparking a price war. In fact, at $5.60 the Asian refining margins have fallen by almost 50 percent from June this year and are expected to drop by a further 30 percent.
“We see refining margins weakening on worsening diesel fundamentals, particularly east of Suez, though gasoline should be supportive. A lot of diesel will be trapped in the Far East and this will lead to run cuts in places like Japan and South Korea as the arbitrage to the west will be closed by growing Middle Eastern supplies” said Robert Campbell of Energy Aspects.
On the other hand, it won’t be easy for Saudi Arabia – Chinese refiners are also producing more gasoline, for which demand is still strong. Moreover, Indian refiners are now moving away from Saudi Arabia which was previously India’s largest crude oil supplier. Indian refiners are now buying more crude oil from Nigeria, Iraq, Venezuela and Mexico. As a result, Saudi Arabia was forced to offer discounts on its heavy and sour grade of crude oil to its Asian customers.
Still, Saudi Arabia can likely wait out the competition. Just as they have kept their crude oil production levels intact, it is possible that the Saudis will maintain their current refining output in spite of falling refining margins and eventually end up winning the price war against Asian producers.
However, one cannot easily neglect the Indian and Chinese refiners. Let us consider the case of Indian private refiners Essar and Reliance, which are among the most complex refineries in the world (refineries which are capable of processing heavier and cheaper crude). These two refineries have seen great success recently, following the recent dip in oil prices after a deal was reached between the P5+1 and Iran, and are likely to build upon their already impressive refining margins (Gross refining margin for Essar refinery was $9.04 per barrel while that of Reliance was $8.70 per barrel in first quarter of 2015).
Given current market conditions, the Asian demand for diesel has reduced mainly due to the weakening Chinese market, while demand for gasoline is increasing in India, Pakistan, Thailand, the Philippines and Vietnam. The price for diesel is expected to fall, and gasoline prices will also continue to fall if there are no run cuts in the Asian refineries.
This all translates into lower prices of refined fuels will eventually benefit Asian customers who will pay less for transportation, basic commodities and essential services.
