Year: 2023

New Home Sales Tumble in August

The August release for new home sales from the Census Bureau came in at a seasonally adjusted annual rate of 675,000 units, below the forecast of 700,000. New home sales were down 8.7% month-over-month from a revised rate of 739,000 in July but up 5.8% from one year ago. The median home price is now at $430,300, down $6,300 from July on a nominal basis. (…)

• Builders Use Price Cuts to Spark Demand

In order reinvigorate buyer interest, builders may be furthering the use of price discounts. As of August, the median new home price has declined 2.3% on a year-over-year basis. The September NAHB homebuilder survey found 32% of builders reported offering price discounts, up from 25% in August and the highest share since December 2022.

Price discounting on the part of builders has narrowed the difference between new homes prices and existing home prices, which are now back on the rise following a brief slump in the second half of 2022. Separately reported, the S&P CoreLogic CS 20-City home price index rose 0.9% during July, the fifth consecutive monthly gain. Higher mortgage rates have led to a decline in existing home sales, but lean resale inventories are exerting upward pressure on home prices.

Compared to the existing market, there is a relative abundance of new homes available for sale. At the end of August, there were 436K units for sale, up 1.2% during the month and equivalent to 7.8 months supply. Since peaking at 9.7 months late 2022, months supply has trended lower over the past year, although the slower pace of sales yielded a slight increase during August.

Second quarter data from the Census’s Quarterly Starts and Completions report was released last month and revealed that newly built homes are getting smaller. The median square footage of a newly started single-family home fell to 2,191 feet, over 100 sq ft smaller than a year ago and the lowest level since late 2010. These smaller homes may provide a more affordable alternative for prospective buyers who have been priced out of larger properties.

  

While housing affordability is at an historical low, and still declining, there is a strong consensus that rental costs will drop. The supporting evidence are charts like this one showing how CPI-Shelter is about to follow private rent deflation.

But the reality is that rent on new leases are actually not declining, merely flattening at a level 25% above its 2021 low.

The above data is for new leases, less than 10% of all leases. Renewals are still inflating 4-5% according to public company statements, supported by the BLS data:

We all know that the BLS data is a slow moving average of actual rents but it still is not showing much of the slowdown everybody and the Fed have been expecting, is it?

People have to live somewhere, those who can’t buy must rent. Since the pandemic, homes have appreciated 45% on average while CPI-Rent is up 19%. And home prices have turned back up…

China Has Second Thoughts About Controlling Prices in Its Massive Housing Market China is starting to loosen pricing rules in its housing market—with unpredictable consequences.

(…) Under the rules, which were applied in dozens of cities, local governments typically blocked developers of new homes from offering discounts of 10% to 15% or more on unsold properties. In some cities, officials put a floor on sale prices for existing homes as well. 

In recent weeks, articles appearing in state media have argued that it may be time to ditch the policies and some cities are starting to loosen them. On Tuesday, the southwestern city of Chengdu removed price restrictions for projects on newly sold land in central areas and scrapped government-guidance prices for existing homes.

A broader retreat from price floors could help developers to clear inventories of unsold properties and raise revenues to pay down their sizable debts, setting the stage for a potential recovery.

But it could also expose Chinese homeowners to bigger drops in home prices, hurting consumer confidence when growth is weak—and potentially destabilizing the financial system.

About 96% of urban households in China owned an apartment as of 2019, according to the country’s central bank. And for many, their home is their largest financial asset. (…)

Private data shows home sales among China’s 100 largest developers plunged by 34% in August from a year earlier, extending a decline since April. Pain from the slowdown has rippled through the economy, depressing consumer spending and construction activity. (…)

Chinese developers had more than 313 million square meters of unsold residential development as of August, up 20% from a year earlier, according to official data. That is around 3.5 million homes, based on the average home size of around 90 square meters. (…)

If property values drop 30% in China—as much as they fell in Tokyo and Hong Kong during past downturns, ANZ said—about 12% of the country’s $5.3 trillion mortgage book, or around $640 billion in mortgages, would have negative equity, meaning the properties would be worth less than their mortgages.

If prices drop by half, about 51% of mortgages would be underwater.

In the U.S., nearly a third of all homeowners with a mortgage had negative equity in the aftermath of the financial crisis, according to Zillow. (…)

Rising Loan Costs Are Hurting Riskier Companies Investors fear unsustainably high interest rates will spark bank-loan defaults.

(…) Many companies borrowed at ultralow rates during the pandemic through so-called leveraged loans. Often used to fund private-equity buyouts—or by companies with low credit ratings—this debt has payments that adjust with the short-term rates recently lifted by the Federal Reserve. (…

Nearly $270 billion of leveraged loans carry weak credit profiles and are potentially at risk of default, according to ratings firm Fitch. (…) Excluding a 2020 spike, the default rate for the past 12 months is the highest since 2014. (…)

“The No. 1 risk to leveraged loans is if we get a big slowdown in the economy.” (…)

Fitch expects about $61 billion of those loans to default in the next two years, the “overwhelmingly majority of which” are anticipated by the end of 2023. (…)

Historically, creditors have recovered about two-thirds of their initial loans during defaults, according to Adatia, but he expects that will be much lower now.

“The overall quality of loan documents is atrocious right now,” he said. “This is 15 years in the making.”

• US small cap stocks wilt in the heat of higher interest rates Smaller companies’ weaker balance sheets exposed by ‘higher for longer’ environment

Goldman Sachs calculates that 30% of Russell 200 companies’ debt is floating-rate vs 6% for S&P 500 companies.

• Dimon Warns 7% Fed Rate Still Possible, Times of India Says Difference between 5% and 7% more painful than 3% to 5% was

(…) “We urge our clients to be prepared for that kind of stress,” the JPMorgan Chase & Co. CEO said in an interview with the Times of India, saying a hard landing remains a risk for the US economy. (…)

Here’s how interest rates are eating on S&P 500 companies’ profit margins, as of Q2:

By market cap:

LSEG IBES data show small and mid cap index forward earnings about flat. Note that while S&P 500 forward EPS are up 4.2% from their June 30 estimate, the S&P 400 and 500 estimates are up 0.5% and 1.5% resspectively. I would not bet my shirt on the Russell 2000 estimate which is up 7.3% from June and includes a bunch of unprofitable companies.

The World’s Biggest Crypto Firm Is Melting Down More than a dozen senior executives have left Binance, and the exchange has laid off at least 1,500 employees this year.

After FTX crashed, the world of crypto seemed to belong to the largest exchange, Binance. Less than a year later, Binance is the one in distress.

Under threat of enforcement actions by U.S. agencies, Binance’s empire is quaking. Over the past three months, more than a dozen senior executives have left, and the exchange has laid off at least 1,500 employees this year to cut costs and prepare for a decline in business. And while Binance still looms large in crypto, its dominance is dwindling.

Binance now handles about half of all trades where cryptocurrencies are directly bought and sold, down from about 70% at the start of the year, according to data provider Kaiko. (…)

The U.S. Justice Department has undergone a yearslong investigation that could result in criminal charges for Binance and Zhao as well as billions of dollars of fines, according to people familiar with the probe.

Binance also faces a Securities and Exchange Commission lawsuit that alleges it and Zhao operated illegally in the U.S. and misused customers’ funds. The firm has acknowledged past mistakes but says customer money is safe and it is committed to compliance. (…)

In the U.S., activity at its local exchange, Binance.US, has basically dissipated. Its chief executive officer, legal chief and risk head all left recently.

In a virtual Binance.US meeting days before his departure earlier this month, Binance.US CEO Brian Shroder said revenue at the exchange had fallen 70% year to date, according to a presentation viewed by the Journal. Executives looked on with dismay.

Shroder told employees Zhao would need to resolve “his regulatory matters, put his .US holdings in a blind trust, or sell his shares” in order for the U.S. platform to maintain its growth initiative. Those steps would allow the company to unblock banking relationships and get licenses, he said. Zhao is the majority owner of Binance.US and the global exchange. (…)

In Europe, more countries are shutting their doors to the exchange. (…)

CONSUMER WATCH

Friday, we get personal income and spending data for August. This is from Morning Consult, a consumer survey firm:

The ‘Resilient U.S. Consumer’ Is Showing Some Signs of Fatigue Consumer spending strength is beginning to wane heading into the fall, just before the resumption of student loan payments

Consumer spending declined in August as summer splurges on travel and entertainment shifted to the rearview and midsummer sales pulled forward some retail purchases to July. Savings and debt may draw resources away from spending in the coming months. (…)

All income groups pulled back on spending in August, but high- and middle-income earners in particular reduced outlays after driving most of the strength earlier this year. High- and middle-income earners spend more on discretionary categories generally, and over the early part of the summer months, these groups helped propel spending above seasonal trends.

Notably, price sensitivity has risen the most for high-income consumers compared with a year ago and is on the upswing again after declining in May and June. If higher price sensitivity persists for high earners, spending could soften further over the next few months.

The recent uptick in top-line inflation is weighing on real income growth and making it more difficult for consumers to save. Both incomes and savings remain below their long-term trend, and just recently ticked lower after several months of recovery. Relative to a year ago, lower-earning households were the only group less able to save. Going forward, the recent increase in energy costs may squeeze budgets for these consumers even more. (…)

Already in August, the large jump in education spending coincided with a 9% pullback in spending on all other categories for Gen Zers, who are most likely to be affected by the expiration of the student loan repayment pause. (…)

• Nike and other retail stocks downgraded as Jefferies warns of spending slowdown

(…) In a survey of more than 600 US consumers that have outstanding student debt, nearly 90% of respondents said they were at least “somewhat concerned” about meeting all their monthly expenses. Half of those surveyed said they were “very concerned.” (…)

Jefferies found more than half of respondents plan to spend less on apparel and accessories, while restaurants and footwear were the second and third most frequently listed categories where consumers plan to spend less. (…)

• Only Richest 20% of Americans Still Have Excess Pandemic Savings

Americans outside the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began, according to the latest Federal Reserve study of household finances.

For the bottom 80% of households by income, bank deposits and other liquid assets were lower in June this year than they were in March 2020, after adjustment for inflation. (…)

But among the wealthiest one-fifth of households, cash savings are still about 8% above their level when Covid hit. By contrast, the poorest two-fifths of Americans have seen an 8% drop in that period. And the next 40% — a group that roughly corresponds with the US middle class — saw their cash savings drop below pre-pandemic levels in the last quarter. (…)

CHINA WATCH

Teetering China Property Giants Undercut Xi’s Revival Push 

Just as China enters a key holiday sales season, a raft of headlines are weighing on already-frail confidence in the property market. Evergrande said it has to revisit its debt restructuring plan and a unit missed a yuan bond payment. Former executives at the defaulted real estate giant have been detained, Caixin reported. Meanwhile, China Oceanwide Holdings Ltd. said it is facing liquidation and Country Garden Holdings Co. is still trying to avoid a potential default. (…)

The eight-day national holiday starting Friday is the centerpoint of the industry’s September-October busy season. The stakes are higher than ever this year, as the housing slowdown weighs on China’s economic recovery and developers that are struggling to refinance rely on cash from sales to meet debt obligations. (…)

• China Evergrande Misses Payments on $547 Million Onshore Bond
• How Country Garden Plays Into China’s Property Mess

(…) Country Garden’s $187 billion of total liabilities as of June 30 were well below Evergrande’s $328 billion. However, Country Garden has four times as many pending projects — 3,121 — as its rival, so a collapse by the firm would in all likelihood have a greater impact than Evergrande’s landmark default in late 2021, according to Bloomberg Intelligence. (…)

If it can’t get the cash it needs to keep building, that could impact as many as 651,000 pre-sold property units, according to BI. (…)

Macron Is Pushing Europe Into $900 Billion Fight With China EU probe into Chinese electric vehicles carries trade risks

(…) Now the EU has begun a subsidies investigation that could lead to tariffs and raises the prospect of a sea change in European policymaking that would cast aside principles of free trade and open markets as the best way of defending the continent’s economic interests. (…)

China’s vice premier, He Lifeng, expressed “strong concern and dissatisfaction” over the probe on Monday to the EU’s chief trade negotiator, Valdis Dombrovskis. (…)

Any provocation of China is a huge gamble for a bloc already struggling to emerge from the energy crisis and the worst bout of inflation in the history of the euro area. Adding to the unease, Chinese tariffs would be difficult to predict and could have the potential to entangle a range of the continent’s biggest firms, including French luxury groups for which Asia’s largest economy is a key market. (…)

• Mercedes S-Class, Porsche Stand to Lose Most in China EV Row Majority of German luxury EVs sold in China are imported

The European Union’s probe into Beijing’s electric-vehicle subsidies is meant to protect its carmakers from a flood of cheap Chinese cars. But if it leads to tit-for-tat tariffs, Mercedes-Benz Group AG and BMW AG’s biggest moneymakers will be most exposed.

For Germany’s high-end manufacturers, including Porsche AG, China has proven an insatiable market for their most expensive models, like the S-Class, 7-Series and Cayenne SUV. Those vehicles, however, are mainly imported, putting them in the line of fire if Beijing retaliates against any EU measures. (…)

China is the biggest destination for Germany’s most expensive vehicles. Last year, the country accounted for more than a third of global sales of BMW’s 7-series and Mercedes’ S-Class. The 1.47 million yuan ($201,000) Maybach ships more than 1,000 times a month from Chinese showrooms.

For Volkswagen subsidiary Audi, China made up more than a third of global sales. Last year, the carmaker exported to China more than 10,000 of its A8 luxury sedans, which are made exclusively in Neckersulm, Germany.

Roeska and Lee estimate that Chinese revenue streams represent more than 25% of the German automakers’ underlying net income. (…)

• Tesla’s China Exports in Crosshairs of EU Anti-Subsidy Probe Carmaker ships more EVs to Europe from China than any other

(…) Through the first seven months of this year, Tesla sold an estimated 93,700 made-in-China vehicles across Western Europe, accounting for roughly 47% of its total deliveries, according to Schmidt Automotive Research. The next biggest exporter of EVs from China to Europe was SAIC’s MG, with roughly 57,500 registrations. (…)

Tesla has enjoyed perks in China that other international companies struggled to obtain, with the most notable being the state’s blessing to wholly own its domestic operations, rather than have to share custody with a local joint venture partner. Tax breaks, cheap loans and other forms of assistance helped turn China into Tesla’s most important market outside the US.

These and other forms of support that China provides domestic manufacturers, including credits from state-owned banks, capital provisions from state investment funds, and provisions of land and electricity, are now coming under EU scrutiny. Chinese carmakers also benefit from subsidies in related sectors across the value chain, including batteries and software. (…)

In recent probes of other sectors such as e-bikes and fiber-optic cables, the EU discovered subsidy margins ranging from 4% to 17%, people familiar with the findings said. (…)

There’s concern within Europe that its companies have fallen behind Tesla and Chinese companies with respect to EV and battery technology, threatening the viability of the EU’s car industry that provides almost 14 million direct and indirect jobs. (…)

BEARISH INSIDERS

(Barron’s via Isabel.net)

YIELD TO OIL?

Private Equity Is Piling Debt on Itself Like Never Before

Hit by a drought of deals and dwindling cash, some buyout firms are starting to resort to backroom financing to help meet fund commitments or enable succession planning. The loans — backed by assets including the promise of future income — carry interest of as much as 19%, a rate that’s more akin to the charges faced by consumers rather than corporate borrowing. Even a junk-rated company in the US paid 10% on a bond recently. (…)

“If the value of the fund drops, for example, you’re looking at a margin call situation,” said Jason Meklinsky, chief revenue and strategy officer at Socium Fund Services, a New Jersey-based firm that helps administer PE portfolios. “It would be like a volcano meets a tornado.” (…)

Cash on hand at PEs is near the lowest since at least 2008, according to data from PitchBook. (…)

One of these types of financings is the relatively new manco loan, for which appetite is soaring. Taken by the management company or the entity that oversees the PE investments, this debt uses cash flows such as fee streams and equity returns as collateral.

The manco loan proceeds are used to meet various needs: seeding new strategies, succession planning and even funding an individual partner’s equity stake in the PE fund. (…)

“The investor universe is unbelievably unaware of the underlying leverage throughout this entire ecosystem,” said New York-based Dan Zwirn, founder and chief executive officer of Arena Investors LP, an institutional manager overseeing more than $3.5 billion in assets. “That hasn’t hit the PE investors yet, but it’s becoming more clear for real estate investors,” he said, referring to the recent delinquencies in the commercial property sector. (…)