Morning Report: Homebuilder sentiment falls

Vital Statistics:

Stocks are lower this morning on weak Chinese data. Bonds and MBS are down.

China reported weak economic data overnight and cut interest rates. It also suspended reporting on youth unemployment data, which hit a record high of 21.3%. To put that number into perspective, the youth unemployment rate in the US was 7.9% in 2022. Nomura said: “We believe the Chinese economy is faced with an imminent downward spiral with the worst yet to come, and the rate cut this morning will be of limited help,” they said.

The increase in US Treasury rates is somewhat perplexing in the face of this, as weakness in China will send a disinflationary pulse throughout the world as commodity consumption falls and credit issues cause a flight to safety. Treasuries seem bound and determined to re-test the highs of October 2022.

Retail Sales rose 0.7% month-over-month and 3.2% year-over-year, according to the Census Bureau. These changes do not incorporate adjustments for inflation, so on an inflation-adjusted basis sales fell YOY. Food and drinking establishments rose the most at 11.9%.

We are coming up on the back-to-school shopping season which is a good predictor of the holiday shopping season. The resumption of student loan payments will be a drag on consumption going forward.

Homebuilder sentiment fell in August due to rising mortgage rates. “Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many home owners elect to stay put because they are locked in at a low mortgage rate.”

“Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%,” said NAHB Chief Economist Robert Dietz. “The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units.”

I talked about homebuilder affordability in my latest Substack. The ratio of the median home price to median income ratio has eclipsed the bubble years of 2006.

Separately, Warren Buffett initiated positions in the homebuilders, buying stakes in NVR, Lennar, and D.R. Horton.