Morning Report: Existing Home Sales fall

Vital Statistics

Stocks are lower this morning after disappointing numbers out of Netflix and Tesla. Bonds and MBS are down.

Bank earnings continue to come in. Truist reported numbers this morning. Mortgage banking origination rose 38% QOQ to $5.6B. They were down 53% on a year-over-year basis. Fifth Third reported originations rose 21% to $1.7B, but still fell 60% on a YOY basis. On the plus side, gain on sale increased to 1.71% compared to 1.21% in Q1 and 0.85% a year ago.

Existing Home Sales fell 3.3% in June, according to NAR. “The first half of the year was a downer for sure with sales lower by 23%,” said NAR Chief Economist Lawrence Yun. “Fewer Americans were on the move despite the usual life-changing circumstances. The pent-up demand will surely be realized soon, especially if mortgage rates and inventory move favorably. There are simply not enough homes for sale….The market can easily absorb a doubling of inventory….Home sales fell but home prices have held firm in most parts of the country,” Yun said. “The national median home price in June was slightly less than the record high of nearly $414,000 in June of last year. Limited supply is still leading to multiple-offer situations, with one-third of homes getting sold above the list price in the latest month.”

Days on market rose to 18 from 14 a year ago, while all-cash buyers accounted for 26% of sales. Investor activity increased to 18%. The first time homebuyer was 27%.

The Index of Leading Economic Indicators fell again in June, according to the Conference Board. “The US LEI fell again in June, fueled by gloomier consumer expectations, weaker new orders, an increased number of initial claims for unemployment, and a reduction in housing construction,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the runup to the Great Recession. Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the US economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending are poised to dampen economic growth further.”

The components pulling down the LEI include the ISM New Orders Index, the inverted yield curve, and consumer sentiment. Consumer sentiment is a squishy indicator, which is often driven heavily by gasoline prices. The ISM New Orders Index maybe has more rigor but it is still one of these diffusion indices without a lot of quantitative meat on the bones. Ever since QE began the shape of the yield curve has been driven by central bank policy, so IMO the information contained in that has been limited at best. Maybe we get a recession, but with the strength of the labor market, I can’t imagine a deep one, if we get one at all.

Bernstein sees equities providing bond-like returns over the next decade. They plot the rolling 10 year return of equities going back almost 150 years. We “take a step back by 100 years or so to get some perspective on the prospect of likely future equity and bond returns over the next decade,” strategists Sarah McCarthy and Mark Diver wrote in a note. “US Equities have delivered 12% annualized total return over the last decade Not bad, but not that unusual,” they said. “While the 2000s were a largely lost decade for equities, the period from the mid-80s to late 90s had a consistent higher 10-year rolling return, in the region of 15%. The 50s and early 60s were similar.”

My gut feeling looking at that chart is that aside from special cases like the tech bubble, long-term interest rate trends are the driver. Long periods of low interest rates are a positive catalyst for stock returns, while rising rates are a negative.

It is easy to forget how long interest rate cycles are. Bonds were in a long term bull market starting during the Great Depression and lasting into the 1960s. Bonds began a secular bear market starting in the 1960s and ending in the early 1980s. The long secular bull market in bonds began in the early 80s and ended last year. Are we in for a 20 or 30 year bear market in bonds? If inflation is a permanent part of the landscape maybe we are.