Widening Home-Price Gap Makes Trading Up Harder

(…) The analysis, by real-estate tracker Trulia, found that fewer midrange or trade-up homes came onto the market over the past four years in metro areas where prices of high-end homes shot up the most.

Midtier homeowners are less likely to try to sell if premium homes are out of reach. That reduces inventory of such homes, leading to sales stagnation and higher prices.

“People may be in a good spot to sell their homes, but if they can’t find another home to buy they’re going to be more likely to stay put,” said Ralph McLaughlin, chief economist at Trulia. “It’s really a gridlock, a traffic jam that’s playing out in the housing market.” (…)

Starter homes are defined as those in the bottom third of the distribution, with a median national price of $154,156, while trade-up homes have a median price of $267,845 and premium homes are priced at a median of $542,805. The median prices for each tier can vary widely across metro areas.

Among the top 100 metro areas across the country, the study found a high correlation between the lower inventory of midrange homes and the price gap between trade-up homes and premium homes. (…)

Across the U.S., Trulia found the inventory of starter homes has decreased the most—by 43.6%—over the last four years, followed by trade-up homes, at 41%, and premium homes at 33.4%. (…)

Q4 Household Debt Service Ratio Very Low

Student-Loan Delinquencies Decline The number of Americans at least a month behind on their student-loan payments is declining, reversing a trend the Obama administration has called a threat to the nation’s economic health.

About one in five Americans, 19.7%, who were out of school and required to be making payments on federal student loans, were at least 31 days behind as of Dec. 31, the Education Department said Thursday.

That figure, which covered only loans made directly by the government, the most common type of student loan, was down from a delinquency rate of 22.2% a year earlier. (…)

The growing labor market is a likely factor behind the drop, as more Americans with college and graduate degrees find jobs and their incomes slowly rise.

Another factor, however, is a surge in enrollment in so-called income-based repayment plans, which set borrowers’ monthly payments as 10% or 15% of their discretionary income, as defined by a formula. About 4.6 million borrowers with direct federal loans were enrolled in such plans as of Dec. 31, a 48% increase from two years earlier. (…)

Other reports show the typical balance of those behind on their student loans is relatively small. Borrowers in default owed a median $8,900, the Education Department reported last year.

Canadian retail sales rebound sharply, lifting growth outlook

(…) Economists on Friday were focused on Statistics Canada’s retail sales report, which showed a 2.1 per cent increase. That exceeded analysts’ expectations and recovered December’s similar decline. Excluding the auto sector, sales were up 1.2 per cent, while overall volumes gained 2.1 per cent. (…)

Consumers had cut back their spending in December in the midst of unseasonably warm weather but five sectors bounced back in January from lower end-of-year sales.

Motor vehicle and parts dealers’ sales jumped 4.8 per cent, the sector’s third gain in four months as sales at new car dealers rose.

Hopefully, these sharp gains won’t be revised down like the U.S. data.

Gavyn Davies: Will China’s new macro strategy pay off?

(…) The latest policy changes are confronting a deteriorating economic situation since the start of the year. The graph below, taken from Fulcrum’s nowcast models, encapsulates the key features of Chinese growth in the current decade:

The long run growth rate (mainly determined by the supply side of the economy) has slowed from 10 per cent at the start of the decade to only 6 per cent now. Not much can be done about that.

There is also clear evidence of a mini cycle around this trend that has an average duration (from peak to peak) of only about a year. The latest mini cycle seems to have lurched downwards in the past 3 months. The estimated activity growth rate today is around 4.7 per cent, which is lower than at previous troughs of the mini cycle, and the model’s confidence bands now extend downwards to 2 per cent, which would represent a true hard landing.

Yet the markets seem completely untroubled by this development, believing that it will prove temporary, and will be reversed by the latest stimulus from demand management. This optimistic expectation will probably prove accurate, though there will be some nervousness until the nowcast starts to rebound.

Macro policy faces a very difficult challenge. It needs to accelerate the rebalancing of the economy without proceeding so rapidly that a hard landing becomes likely. Ideally, such a strategy would have the following ingredients:

• fairly rapid closure of moribund capacity in the manufacturing sector to reduce deflationary pressures;
• easier monetary policy to assist domestic demand and cushion the property sector;
• easier fiscal policy, directed mainly towards boosting consumption rather than investment;
• a one-off adjustment (of about 10-15 per cent) in the exchange rate to restore confidence in the basket “peg”, thus ending destabilising capital outflows which undermine the necessary easing in domestic monetary conditions;
• a comprehensive programme to recapitalise the banking sector as loan write offs are accelerated, mainly in the area of non performing loans to the state owned enterprises;
• further reforms to broaden price signals in the financial and services sectors, and the labour market.

(…) As the SOE work-out takes place, the government has now clearly recognised the need to support the economy through easier monetary and fiscal policy if necessary.

On the monetary side, PBOC Governor Zhou said that the policy stance will remain on the looser edge of “prudent”, which is the central setting of the five main categories used by the central bank. The announcement of a 13 per cent target for M2 growth, and a new 13 per cent target for total social financing, suggest that the authorities have now accepted that they cannot bring down overall leverage in the economy at present. In fact, with nominal GDP likely to rise by only about 8-9 per cent this year, the debt/GDP ratio will continue to rise rapidly. No change in the “basket peg” for the exchange rate is likely, which might mean that further squalls will take place in the currency markets.

On the fiscal side, the new budgetary announcements suggest that the overall thrust of policy will be slightly expansionary, though independent fiscal watchers have reached different conclusions on how expansionary it will be in practice.

The table shows J.P. Morgan’s estimates of the various budget categories. The official budget (lines 1 plus 2) shows little change in the policy stance, but there is a consensus among fiscal watchers that quasi-fiscal easing (lines 5 to 7) will increase markedly if needed.

Although the Premier has emphasised that there will be tax reductions to support the household sector (which will make Ben Bernanke happy), it seems inevitable that the main source of fiscal support will come from infrastructure spending, as it has always done in the past. In fact, that is clearly shown in the fixed investment data released so far in 2016.

What is the overall verdict? In many ways, the strategy resembles the SOE work-out that occurred in the late 1990s and early 2000s (well summarised here). That involved many years of hard graft, but it did succeed in the end.

• China’s Central Bank Chief Sounds Warning Over Rising Debt

(…) “Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,” Zhou said. He said a high leverage ratio is more prone to macroeconomic risk. (…)

Corporate debt alone now stands at 160 percent of China’s GDP, according to the Organization for Economic Cooperation and Development. The group’s secretary-general, Angel Gurria, said earlier in the day that sectors with especially high leverage include cement, steel, coal and flat glass, and China must address the issue. (…)

One option for addressing high leverage is to develop “robust capital markets,” Zhou said. The country should channel more savings into the capital markets, which will help reduce leverage in the corporate sector and boost equity financing, he said. (…)

Earlier in the day, Vice Premier Zhang Gaoli said the government would do what it must to avoid turmoil in stocks, the currency, bonds and property. He said the government should ensure that a plan for local governments to swap high-cost debt for cheaper municipal bonds proceeds.

“There will be no systemic risks — that’s our bottom line,” Zhang said.

China Car Sales Suffer Biggest Crash On Record To Start 2016

2016 has started with a 44% collapse in China passenger car sales. This is thebiggest sequential crash and is 50% larger than any other plunge in history.

While there is a seasonal effect here obviously, the sheer scale of this 2-month drop – which removes the new year holiday affect – indicates something is terribly wrong in China.

Something is also terribly wrong at Zerohedge as the so-called Tyler Durden omitted to take account of the phenomenal growth in SUV sales in recent months. From the China Daily last week:

China’s auto sales fell slightly in February, though industry officials say the dip does not reflect a longstanding trend.

Last month, 1.58 million vehicles were sold, according to the China Association of Automobile Manufacturers. (…) Auto sales in the first two months this year totaled 4.09 million, a 4.4 percent growth from the same period last year, similar to last year’s overall growth rate. (…)

In February, China sold 478,000 SUVs, a 44 percent surge year-on-year, a continuation of the sales momentum seen last year. (…)

Sedan sales were another story. Almost 700,000 sedans were sold in February, a 17.8 percent slump year-on-year. (…)

Why the Global Oil Glut Might Not Fill Swimming Pools After All

M&A Bankers Saying No to More Junk Debt Banks are less willing to take on and sell the junk bonds and leveraged loans that heavily indebted acquirers use to pay for takeovers.

Credit Suisse Group AG, Jefferies Group LLC and Wells Fargo & Co. are among the firms turning down new requests for financing—typically from low-rated companies—as they retreat from the lucrative but risky business of backing debt-heavy buyouts, people familiar with the matter say.

Banks guarantee the funding in these deals, hoping to then offload all or most of it to bond and loan investors. They promise to provide the money themselves if they can’t find others to buy the debt. But as markets swooned in the months since the summer, investors have lost their appetite for the riskiest securities, making them harder to sell.

Some banks have unloaded the debt at discount prices, taking losses, while others are holding the loans in hopes of getting better prices later, which ties up bank capital and can hurt profitability. Banks were left with at least $1 billion in debt on their books over the past 12 months, according to banks and analysis by The Wall Street Journal.

With banks less willing to underwrite the most leveraged loans, the flow of new takeovers has slowed. U.S. mergers and acquisitions announced this year have fallen 21% from a year earlier to $229 billion, according to data from Dealogic. The pullback has made it hard for private-equity firms, which use a lot of debt in their takeovers, to get deals done. Those that are getting done, many are built to minimize junk debt, or debt rated below investment grade.​New junk-bond sales are down 70% this year. (…)

While junk bond prices have rebounded in a broad market rally, debt-financed M&A and new sales of high-yield debt have yet to pick up. (…)

SENTIMENT WATCH

U.S. Stocks Rise, S&P 500 Joins Dow Average to Erase 2016 Losses

And yet, as Bloomberg reports,

investors of virtually all types have sold more stock than they’ve purchased, according to Bank of America Corp. In the week ended March 11, the bank’s hedge fund, institutional and private clients sold $3.7 billion, the most since September and the seventh consecutive week of withdrawals, the company said in a note last week. Net sales by institutions were the second-biggest since the bank began recording the data.

True, small investors remain cautious:

But some people have been buying as this other Yardeni chart shows:

BofA might be having a market share problem. Members of the National Association of Active Investment Managers have been increasing equity exposure in recent weeks:

Transport Stocks Signal Markets on Track

(…) The Dow Jones Transportation Average entered bull-market territory on Thursday, rising 22% from its Jan. 20 low through Friday, and rallying to post nine consecutive weeks of gains. The Dow Jones Industrial Average has increased 12% since Jan. 20.

It is a sign of a new outlook from investors, who spent the early part of the year selling stocks tied most closely to the fate of the economy, sending the transportation index to a two-year low. At the same time, it is the latest example of a rapid and extreme shift in the market, which has made some investors skeptical about the potential for further gains.

Investors watch the index closely because it includes freight carriers such as Kansas City Southern and Union Pacific Corp., along with airlines and shippers such as FedEx Corp., that many consider bellwethers for economic growth. (…)

Part of the reason the stocks are in demand: Improving data on freight moving through ports, airlines, railroads and trucking companies are helping to calm investors’ growth worries. (…)

Some observers of the century-old Dow Theory, however, are waiting to see more. The theory holds that investors should buy if the Dow Jones Transportation Average and the Dow industrials both rise above previous highs. (…)