Economic data continues to confirm that housing is the key pillar supporting continued U.S. economic expansion, generating 40 percent of second quarter growth. Concerns, therefore, about the effects of higher mortgage rates, up by over 100 basis points since May 1, 2013, are justifiable. Recent data releases have been mixed and much housing data lags by several months.
Two weeks ago, housing starts data appeared positive, ticking up to 896,000 from 846,000, with the biggest contributor being multi-family housing. But last Friday, new home sales came in at their lowest level in nine months, down 13.4 percent from June. New home sales are booked when a contract is signed, a key difference from existing home sales, which are booked months later when the deal closes. As such, new home sales are the most current indicator of housing activity. This makes the recent collapse of new home sales exceptionally disturbing. All told, there has been a 20.7 percent decline in new home sales in June and July. We would view any other business that experienced a 20 percent decline in activity over a two month period as in a highly difficult position. Putting all of this together, there is strong evidence that the economy is eroding below the surface. Importantly, this comes at a time when the U.S. Federal Reserve is under increasing scrutiny over whether it will maintain its apparent commitment to tapering its bond-buying after the Federal Open Market Committee’s September 19 meeting. My view is that it appears likely that the Fed will continue signaling that a reduction of its bond purchases will happen, but that the central bank will probably start hinting about taper-lite, or a smaller reduction of its bond buying, than it signaled back in June. As all this plays out, it appears as though volatility will continue to rise as we head into September.
Pending sales of U.S. homes declined 1.3 percent in July, the largest monthly fall this year, following a 0.4 percent decrease in June. Pending home sales tracks the number of signed real estate contracts for existing homes and serves as a leading indicator for existing home sales. Given the fall in pending home sales and the plunge in new home sales, we expect existing home sales to follow this declining pattern soon.
Source: Bloomberg, Guggenheim Investments. Data as of 7/31/2013.
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