The Mortgage Corner
Sales of newly built, single-family homes rose 3.5 percent in June from an upwardly revised May reading to a seasonally adjusted annual rate of 592,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. New home sales are up a huge 9.3 percent in the second quarter of 2016 from the first quarter.
And the National Association of Realtors’ pending home sales index rose to 111.0 from 110.8 in May. The index is 1.0 percent higher than a year ago, due mostly to record low mortgage rates and the loosening of conventional qualification requirements by Fannie Mae and Freddie Mac. That was probably an inevitable correction following a massive three-month increase totaling 9 percent from February through April, said Reuters.
And this is severely crimping supply, pushing down housing inventories into the 4 month range, which in turn should push housing construction to new highs. But that should five another boost to growth, and consumer confidence.
“The fact that new home sales reached their highest pace in over eight years shows the housing market is gaining momentum,” said NAHB Chief Economist Robert Dietz. “The market should continue to firm throughout the year, propelled by low mortgage interest rates and solid growth in employment.”
Consumer confidence is also near post-recession highs, at 97.3 in July and nearly holding onto June’s 5 point jump. “Consumer confidence held steady in July, after improving in June,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers were slightly more positive about current business and labor market conditions, suggesting the economy will continue to expand at a moderate pace.”
The main reason for their optimism is real, after tax incomes are now rising some 2.5 percent, which is enough that consumers are able to pay down their debt. Morgan Stanley in a recent research note says the amount of debt relative disposable income has fallen sharply. It currently stands at about 106 percent, down from 135 percent in 2008. And the ratio of payments to after-tax income has slipped near the lowest levels of the past three decades.
But Morgan Stanley expects the ratio of capital spending-to-sales at S&P 1,500 companies to slip to 4.6 percent by the end of 2016, excluding energy and utilities. That metric stood at 6 and 9 percent before the last two recessions, not a good sign for future robust growth. If so, it means slow, steady growth for the foreseeable future. Capital spending declined in key sectors like energy, materials, telecom and consumer staples during the third quarter, which means corporations aren’t investing much in these areas. And nonfinancial companies in the S&P 1500 are now sitting on some $1.7 trillion in cash, with nowhere to put it but into more stock buybacks and higher CEO salaries.
Jobs-hard-to-get, a subcomponent of the present situation index for consumer confidence, hints at a better July employment report, falling to 22.3 percent from 23.7 percent in June which was already a very strong month for the labor market. And readings on future employment, which is a subcomponent of the expectations index, also show improvement with slightly more seeing more jobs opening up and fewer seeing fewer jobs ahead, said the Conference Board report.
Fannie and Freddie’s conforming and non-conforming Hi-Balance loan terms are also more accommodating, with mortgages now obtainable up to 95 percent loan to values even for Hi-Balance maximum loan amounts of $625,500. They have also removed some of the additional charges for credit scores below 720, which will help to make those mortgages more affordable.
There is of course the slim possibility that the Federal Reserve will raise interest rates sometime later this year, which could ultimately slow down consumer spending and this housing recovery. In just released minutes from its latest FOMC meeting, Fed Governors said “Near-term risks to the economic outlook have diminished,” which some pundits believe could hint at a possible rate hike in upcoming FOMC meetings.
This could hurt Morgan Stanley’s prediction of future growth, as well. So stay tuned!
Harlan Green © 2016
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