U.S. Consumer Credit Growth Increases in October
Consumer credit grew $27.1 billion (8.1% y/y) during October after increasing $25.8 billion in September, revised from $25.0 billion. The ratio of consumer credit outstanding to disposable personal income eased to 25.1% from 25.2% in September and remained near the highest since March 2020. It was increased from 19.4% in March 2021.
Revolving consumer credit balances grew $10.1 billion in October (15.0% y/y) after increasing $7.9 billion in September, revised from $8.3 billion. (…)
Nonrevolving consumer credit balances rose $17.0 billion (6.0% y/y) during October after increasing $17.9 billion in September, revised from $16.6 billion. (…)
This is for October which showed decent retail sales growth albeit still below inflation. Goldman Sachs previews holiday sales:
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Across Adobe’s panel of online retailers, nominal spending over Black Friday weekend and Cyber Monday rose 4.0% year-on-year, well below the double-digit pace throughout the 2010s and the 10.8% pace of ecommerce sales growth in Q3 of this year. Because of the importance of online shopping, the Adobe data are a useful predictor of the November retail sales report (correlation +0.58 since 2012) and argue for a below-trend reading in 2022. Turning to brick and mortar, Fiserv credit card spending and Redbook’s department store panel indicate a pickup in spending growth during Black Friday week but only modest sequential growth for November as a whole.
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We also believe the previously reported strength in October retail sales creates a high hurdle for incremental spending growth in November and December, especially because October spending benefitted from stimulus checks in California ($6.2bn of Middle Class Tax Refund payments, two-thirds of which were in October). Taken together, we are assuming a 0.2% decline in November retail control (mom sa) and a flat reading for December. We will finalize our forecasts as the remaining nowcast inputs become available.
The Chase credit card spending tracker, updated through November 29, suggests control sales up 0.3% MoM in November after +0.7% in October.
What’s Going On With the Housing Market? Home buyers and sellers are trying to make sense of a downturn that’s full of contradictions: Demand has seized up but supply is still low; prices are sliding but not plummeting; and no one can agree on what comes next.
(…) Next year’s predictions for home prices are unusually varied, economists say. KPMG LLP, an audit and consulting firm, is calling for prices to fall 20% next year, and Goldman Sachs Group Inc. forecasts a 7.5% drop. The National Association of Realtors, meanwhile, is forecasting a 1.2% increase in existing-home prices, and the Mortgage Bankers Association sees prices up 0.7% next year. (…)
The surge in interest rates has pushed both buyers and sellers out of the housing market. Buyers have been priced out, or they have retreated because they think prices might be lower in the future. (…)
Almost 70% of households with mortgages have rates below 4%, and they are reluctant to trade in a low mortgage rate for a higher one on a new home. (…)
An impending downturn could look more like the piercing but swift decline in activity recorded in the early 1980s, when the Fed raised rates to double-digits to address very high inflation, said Doug Duncan, chief economist at Fannie Mae.
“People simply stopped transacting,” he said. “As soon as the Fed got control of inflation and started working it down, you saw transactions start to pick up.” (…)
Fannie Mae is forecasting that home prices will fall 1.5% next year and 1.4% in 2024. (…)
Real-estate research and advisory firm Zelman & Associates, a unit of Walker & Dunlop Inc., expects home prices to fall 12% from their peak a few months ago through late 2024, before starting to rebound. John Burns Real Estate Consulting expects prices to fall 20% peak-to-trough and also expects the low point near the end of 2024. (…)
The homeowners most at risk are those who bought homes when prices were near their peak. About 8% of homes bought with mortgages in 2022 were underwater as of September, according to mortgage-data firm Black Knight Inc. (…)
Recently, the number of homes for sale has increased as homes sit on the market longer. In the four weeks ended Nov. 27, the number of active listings on the market rose 12.9% from a year earlier, according to Redfin, the real-estate brokerage. But the new listings of homes for sale in that period fell 21% from a year earlier, and supply remains lower than normal. (…)
Builders increased production in recent years to meet demand, and they have a large backlog of homes still under construction.
About 37% of builders surveyed by the National Association of Home Builders said they cut prices in November, and almost 60% of builders said they used incentives to attract buyers, such as paying lenders to reduce buyers’ mortgage rates. (…)
[Scottsdale, Ariz.-based builder Meritage Homes Corp.] has cut its prices in some markets, and its cancellation rate rose to 30% in the third quarter, up from 13% the prior quarter. (…)
Affordability is the word: buyers can’t afford high prices with high mortgage rates, sellers can’t afford to switch from a low to a high mortgage house. Moody’s Analytics estimates that the median sales price for existing homes in 2021 was 5.3 times the median household income—well above the 4.6 ratio in 2020. The previous peak was 4.9 in 2005. By comparison, price-to-income ratios averaged 3.9 in the 2010s, 4.1 in the 2000s, and just 3.1 in the 1980s.
The only motivated sellers are builders stuck with high and rising inventory. The construction cycle is longer this year due to shortages (labor & material). New homes for sale (470k) are 45% above their pre-pandemic level with another 300k under construction.
The average new home sold for nearly $550k in October, up 45% from pre-2020. Part of this jump in the average price is due to changing mix. Harvard University says that “in just the past two years, the share of new homes that sold for at least $400,000 increased from a third of all homes to more than half (56 percent).” Current estimates of the cost to build a typical 2000 sq.f. house vary greatly but are centered around $300k, plus land.
Redfin calculates that a homebuyer on a $2,500 monthly budget can afford a $383,750 home with a 6.5% mortgage rate; that same buyer could afford a $406,250 home with a 5.8% rate. With a 3% rate, which was common in 2020 and 2021, that same buyer could afford a $517,000 home.
(…) Sellers are taking their homes off the market because they’re often receiving no offers for the price they want to sell for, and sometimes, no offers at all. That’s due to a sharp drop in homebuyer demand driven by rising mortgage rates and persistently high home prices. While mortgage rates have dipped slightly since mid-November, the monthly mortgage payment on the median-asking-price home is still 40% higher than it was one year ago. (…)
(…) The median rent rose 2.1% from October to $4,095, the third-highest level ever recorded by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Yet there were also indications that demand wasn’t particularly strong, including a rising share of new leases signed with concessions and a higher vacancy rate.
“The market largely is moving sideways,” said Jonathan Miller, president of Miller Samuel. “We’re having some ups and downs from month to month, but not any big moves in either direction.” (…)
Manhattan’s vacancy rate last month was 2.42%, up from 2.35% in October. It had been below 2% for much of the year.
Rent Rant (3)
Addendum to yesterday’s Rent Rant (2):
@jayparsons, an economist at RealPage, tweets this plot linking asking rents on new leases with renter incomes, suggesting that even new leases may not drop as much as many are forecasting.
Apartment renter incomes continue to grow, but the pace is moderating … and interestingly, the moderating pace mirrors the trend in asking rents. Still, this is an encouraging trend for renter affordability — with household incomes among new lease signers up 8.1% YoY.
‘Huge, Missing and Growing:’ $65 Trillion in Dollar Debt Sparks Concern
There’s a hidden risk to the global financial system embedded in the $65 trillion of dollar debt being held by non-US institutions via currency derivatives, according to the Bank for International Settlements.
In a paper with the title “huge, missing and growing,” the BIS said a lack of information is making it harder for policy makers to anticipate the next financial crisis. In particular, they raised concern with the fact that the debt is going unrecorded on balance sheets because of accounting conventions on how to track derivative positions.
The findings, based on data from a survey of global currency markets earlier this year, offer a rare insight into the scale of hidden leverage. Foreign-exchange swaps were a flashpoint during the global financial crisis of 2008 and pandemic of 2020, when dollar funding stress forced central banks to step in to help struggling borrowers.
To be sure, the debt is fully collateralized and backed by hard currency. To understand how the system works, consider a Dutch pension fund buying assets in the US. As part of the transaction, it will often use a foreign-currency swap to exchange euros for dollars. Then, when it’s closed out, the fund will repay dollars and receives euros. For the length of the trade, the payment obligation is recorded off-balance sheet, which the BIS calls a “blind spot” in the financial system.
It’s that opacity that puts policymakers at a disadvantage, according to BIS researchers Claudio Borio, Robert McCauley and Patrick McGuire.
“It is not even clear how many analysts are aware of the existence of the large off-balance sheet obligations,” they wrote. “In times of crises, policies to restore the smooth flow of short-term dollars in the financial system — for instance, central bank swap lines — are set in a fog.”
Central banks have found ways to manage the demand for dollars during times of stress. The Federal Reserve has tools, such as swap lines and the FIMA Repo Facility, to help prevent markets from seizing up.
For researchers at the BIS, it’s the sheer scale of the swaps that’s worrying. They estimate that banks headquartered outside the US carry $39 trillion of this debt — more than double their on-balance sheet obligations and ten times their capital. Accounting conventions only require derivatives to be booked on a net basis, so the full extent of the cash involved isn’t recorded on a balance sheet.
“There is a staggering volume of off-balance sheet dollar debt that is partly hidden, and FX risk settlement remains stubbornly high,” said Borio, head of the monetary and economic department at the BIS.
In a separate report on Monday, the BIS also flagged the settlement risk as another potential source of instability in the foreign-exchange market. Researchers estimate that $2.2 trillion of daily currency turnover was subject to settlement risk, the possibility that one party to a trade fails to deliver the asset.
Payment-versus-payment arrangements, a settlement mechanism that coordinates transfers to ensure no one is left holding a claim, tend to be unsuitable or too expensive for certain trades, the BIS paper said.
“There is clearly an urgent need for wholesale market participants to look for alternative ways to eradicate settlement risk exposure across a broad range of currencies outside of the traditional majors,” said Jerome Kemp, president at post-trade processing firm Baton Systems, in response to the paper.
MEME has no pulse The SPX vs MEME ETF gap stays very wide. Is the “crap” trying to tell us something? (The Market Ear)
Refinitiv
Netherlands Plans Curbs on China Tech Exports in Deal With US The Netherlands and Japan are the world’s top suppliers, outside the US, of machinery and know-how needed to make advanced semiconductors, but Washington is yet to get those allies fully on board.
(…) The new export limits under consideration by the Netherlands could bar the sale of equipment capable of making chips designated as 14 nanometers or those that are more advanced, according to the people, using a reference to the industry standard for measuring semiconductor technology. That move may put Dutch regulations at least partly in line with US restrictions announced Oct. 7. (…)
China accounted for about 15% of [Dutch firm ASML Holding NV]’s revenue last year, according to its latest annual report. (…)
Officials are still discussing the details, but the step may effectively stop exports of the company’s immersion lithography machines, its second-most advanced gear, for Chinese clients who use them in combination with tools from other suppliers to manufacture 14-nanometer chips or those that are more advanced.
Washington has some leverage over the Netherlands as ASML uses US-made components. Since early October, American officials have threatened that if allies do not comply with the new export-control measures, they could ban sale of foreign equipment that contains even the smallest amount of US technologies to China. (…)
China’s Xi Jinping to Meet Saudi Crown Prince in Pivotal Visit The leaders of China and Saudi Arabia will sign agreements worth more than $29 billion as the desert kingdom deepens ties with global partners, including U.S. rivals.
Chinese leader Xi Jinping met with Saudi leaders Thursday at the start of a multiday state visit, as the oil-rich desert kingdom strengthens ties with U.S. rivals amid doubts about Washington’s commitment to the Middle East. (…)
No details about the deals have been made available, but progress in talks about pricing some Saudi oil sales in yuan, which The Wall Street Journal reported accelerated this year, would draw intense U.S. scrutiny, as would any new weapons deals or further cooperation on 5G and 6G telecommunications networks. (…)
China is already Saudi Arabia’s top trading partner and the biggest buyer of its crude. Even as the world looks to renewables, those trends are expected only to accelerate, with the last barrels of oil likely to come from Saudi fields and be consumed in Asia.
But ties between the two countries have grown in recent years to also include massive contracts for Chinese construction companies, widespread adoption of Chinese technology despite security concerns and even transfer of military hardware such as drones and ballistic missiles, as well as help fabricating uranium yellowcake, needed for a civil nuclear-energy program or nuclear-arms capability.
The growing defense and geopolitical aspects of the Chinese-Saudi relationship alarm Washington, which has long been the dominant security force in the energy-rich Middle East. But China hasn’t yet demonstrated interest in supplanting that role, or the ability to do so, and the Saudis don’t really want to replace the U.S. as their main security guarantor, analysts say. (…)
- Beijing running out of fever medication as Covid outbreak spreads Hospitals ration supplies and long queues form at testing centres as China relaxes restrictions
- Iran executes 23-year-old protester