First a warning: Analyzing 2021 new home sales takes time and effort. It requires examining and understanding multiple data sources that cover different time periods. Therefore, quickly written media reports focusing on one or two measures are incomplete and overly simplistic. For the current period of abnormally slowing sales, more depth is required.
What is really happening
Note: Judging reality means focusing on actual, non-seasonally-adjusted results. The seasonal effects can then be overlaid for a fulsome analysis.
First, new home sales have been lower than expected over the past three months. Importantly, this slowing is taking place in the strong summer selling period. Next comes the naturally slower fall/winter months. (After hitting peak sales of 83K in March, the usual high point of each year, the April to July sales came in at 74K, 64K, 63K and 63K.) Remember: new home sales are counted upon the signing of the contract. Many sales are recorded prior to the home’s completion.
Second, new homes-for-sale inventory has increased to a historically typical level in terms of months of sales (about 6). The July data are 368K new homes for sale and 63K new homes sold, meaning an inventory of 5.8 months (at the July sales rate). The sharp increase in inventory since March (up 21% from 305K) shows homebuilders were anticipating higher sales. Additionally, the increase shows that the number of construction workers (now at a historically high level of 899K) and the supply of lumber (now selling at low prices) were ample, not restrictive.
Third, median new home price increases have been trailing that of existing homes, indicating that “too-high” pricing is likely not the cause of slowing sales
Fourth, homebuilder stock prices and low current price/earnings ratios indicate investment analysts are adjusting the “consumer cyclical” company outlooks down. Remember: Cyclical stocks look cheap at their peaks and expensive at their troughs.
Fifth, the three components (*) of the NAHB/Wells Fargo Housing Market Index (measuring homebuilder attitudes) continue to show a good level of optimism, but have declined steadily since November 2020 (the peak of the rise caused by the dramatic new home sales jump earlier in the year). Then, in the last report, the two current components showed a larger drop – still at good levels, but indicative of a downtrend.
(*) The three components are present sales conditions, anticipated (next six months) sales conditions and prospective buyer traffic. The declines for the three indexes from last November to August are 96 to 81, 89 to 81, and 77 to 60 (traffic always has lower numbers than the other two). While anticipated held steady at 81, both current items, present and traffic, dropped 5 points from July to August.
Here’s where the media reports go wrong
They use seasonally-adjusted data that exaggerates or masks the non-seasonal shifts
They use seasonally-adjusted outlooks that hide the approaching large, winter declines in new home sales
They compare new to existing home sales data by report date, but the data time periods are dramatically different
They overstate the importance of low interest rates – history clearly shows a lack of correlation
They continue to use old, abnormal or unsupported effects to support their reasoning (e.g., high lumber costs and difficulty in finding workers)
They refer to homebuilder attitudes using a cherry-picked quote or two instead of examining the survey data covering all homebuilders
Finally, they now attribute the recent slowing sales to a strategy somehow being carried out collectively by the diverse group of competing homebuilders: Holding back the supply of homes (and sales) to capture higher future prices. Conspiracy? Collusion? No – nonsensical, particularly in the face of the coming winter decline in sales.
For that last item, The Wall Street Journal provides two articles that, first, promote this idea, then disprove it. On August 17, “Home Builders Are Restricting Sales, Pushing Up New Home Prices – Many cannot increase construction quickly enough to meet booming demand and are turning away business.” One week later, on August 25, “Home Builders Restock Their Shelves,” saying, “Home builders sold some [very few] more new houses in the U.S. last month than they did in June. But the bigger news might be that builders have more houses to sell.” Using seasonally-adjusted numbers, the article states a 6.2 month inventory. The conclusion to this article is the key: “Home builders have built it [the inventory]. Now it is a matter of waiting to see if buyers come.”
Reminder: That inventory is an absolute, non-adjusted number. The coming sales reports in the WSJ and elsewhere will be inflated by seasonal adjusting and annualizing (multiplying by 12) through February 2022, but the inventory will only decline by the net number of actual, unadjusted monthly sales less the number of newly constructed homes for sale.
The bottom line: Weakening new home sales imply softening economic growth
Homebuilding (AKA residential construction) is not simply a small, standalone industry. It is a meaningful participant in the U.S. economy’s growth. Beyond its actual money impact is the confirmation it provides for the health of the economy, as well as the well-being and confidence of consumers. Therefore, weakening new home sales growth can be a sign of problems elsewhere.
For an alternative view, see this August 27 article from Barron’s: “The Housing Market Isn’t a Bubble Yet. These Stocks Could Keep Climbing.”
Slow pace of vaccinations is largest drag on the economy in survey of business leaders – NBC News
Corporate leaders are far less bullish about the economic recovery than they were back in the spring — and they fear that vaccination holdouts could stall or even reverse the progress that has been made.
A new survey by the National Association for Business Economics, or NABE, found a marked pullback in expectations for economic growth and output, especially in the near term. Survey respondents expect real growth in gross domestic product for this year to come in at 5.6 percent at the median — a significant drop from the median 6.7 percent growth expected in May, when the survey was last conducted.
“The erosion of forecasts and confidence has really mirrored what our economists have been saying, because we brought down our Q3 GDP forecast from 7.0 to 5.6 percent,” said Sam Stovall, chief investment strategist at CFRA Research. “We just feel that things don’t look as rosy as they did before.”
Nearly 2 in 5 NABE survey respondents said downside economic risk outweighs upside risk for the year, and just 16 percent said conditions are weighted toward the upside. The figures were reversed in May, when 56 percent ranked upside risk as a higher probability and just 15 percent said saw greater downside risk to the outlook.
The key difference, and the factor that is weighing on hopes for the recovery, is the resurgence of Covid-19 fueled by the highly contagious delta variant of the coronavirus. Everybody who was banking on the pandemic’s receding over the summer has had to modify their expectations in the face of a public health crisis that shows no sign of abating.
“We all believed we were through the pandemic five months ago, and I believe that the variant has caught many people by surprise,” said Joseph Heider, president of Cirrus Wealth Management. “As this lingers on, executives are becoming more concerned and asking, ‘Are we going to have this under control?'”
NABE survey chair Holly Wade, executive director of the NFIB Research Center, said in the survey outlook report, “Panelists point to a variant of the coronavirus, against which the vaccines may be ineffective as the main downside risk.” Nearly two-thirds of respondents identified that as the greatest downside risk to the economy, and 9 percent more cited slowing vaccine uptake as the most worrisome hurdle. A plurality of 44 percent said a faster vaccine rollout is the best chance for higher-than-expected economic gain.
Heider said: “Vaccine resistance is, I think, larger than many people anticipated. I think it’s creating real concerns as to our ability to reach herd immunity. And when we don’t have herd immunity, the unvaccinated are human petri dishes for the virus to mutate.”
Although the virus represents the biggest threat to near-term business recovery, analysts said it is far from the only headwind corporations face. “There’s just many more variables and unknowns than there were six months ago,” said Dick Pfister, CEO of AlphaCore Wealth Advisory.
In addition to the threat of Covid and potential variants, Pfister said, companies and investors are monitoring other unfolding circumstances. The Federal Reserve is edging closer to ending its bond buying, and more policymakers have expressed openness to raising interest rates sooner. The financial peril faced by the heavily indebted Chinese real estate giant Evergrande is making investors nervous, he said, as they try to gauge whether the company’s teetering on the brink of collapse was an isolated incident.
“There’s probably more than just one, and there are some fears from economists that this could be more systematic inside of China,” he said.
A globally connected economy poses other sorts of risks, as well: A cascading series of bottlenecks in the global supply chain affecting semiconductors to energy has triggered much of the growing worry about rapidly increasing prices. The NABE survey found that 17 percent of respondents said supply chain disruptions were having a “significant impact” on business, while 27 percent more cited mild or moderate impacts.
“Inflation expectations have moved up significantly from those in the May 2021 survey,” Wade said. On average, NABE respondents expect inflation to rise by 5.1 percent in the fourth quarter year over year, a jump from an expected 2.8 percent increase in the May survey.
David Wagner, portfolio manager at Aptus Capital Advisors, said the duration and the breadth of global supply disruption have triggered a re-evaluation in corner offices in the U.S. and around the world. In the spring, “it seemed like the supply chain problem was transitory,” but the assumptions were dashed as the summer went on, he said, adding: “Supply chain problems are persisting for much longer than originally expected.
“Now that you’re starting to see some kind of tangible supply chain backlog, I think that’s got more people pessimistic. It caught people by surprise,” Wagner said.
Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said, “Supply concerns are weighing on the mind of the market and economists because it has limited the amount of output we can get from certain industries.”
Along with the supply shortages that are hindering production and driving up costs, the unbalanced labor market continues to constrain growth, as well — but there also are glimpses within those distortions of potential normalization. Although about one-third of survey respondents said they were facing a surfeit of workers, a larger proportion, 44 percent, said they were not experiencing a labor shortage. Respondents predict wage growth of 4 percent for the year, followed by a 3.5 percent increase next year — rates broadly in line with what many economists consider to be indicative of a well-functioning labor market.
“The labor market is not fully recovered — we’re seeing that across other surveys, as well, and even the Fed’s own Beige Book indicates that hiring has been challenging,” Haworth said. “There’s a lot of room for improvement, but it’s really slow going.”
Toronto market rises as energy shares reach 3-month high
Canada‘s main stock index rose on Monday as a rally in oil prices lifted the energy sector to the highest level in nearly three months, while financials gained ground as bond yields rose.
The Toronto Stock Exchange‘s S&P/TSX composite index ended up 60.76 points, or 0.3%, at 20,463.42.
“Energy has rallied pretty nicely” on the jump in oil prices, said Kevin Headland, senior investment strategist at Manulife Investment Management.
The energy sector rose 3.1% to notch its highest closing level since July 5, while crude oil futures settled nearly 2% higher at $75.45 a barrel as investors fretted about tighter supplies.
The heavily weighted financial services sector ended 0.5% higher but information technology lost 1.2%.
The move lower in technology was “a carryover from the U.S., given the jump in 10-year yields today,” Headland said.
The U.S. 10-year yield rose above 1.5% for the first time since June 29 before easing, bolstered by solid economic data and signals the Federal Reserve is shifting toward a more hawkish policy.
Higher yields tend to hurt the shares of companies with high growth prospects because they reduce the value of future cash flows.
The S&P 500, which has a higher technology weighting than the Toronto market, ended lower.
“In the Canadian stock market… we’re playing a little bit of catch-up to U.S. stocks as they outperformed Canadian stocks in the last five sessions,” said Michael White, portfolio manager at Picton Mahoney Asset Management.
The healthcare sector, which includes cannabis producers, ended 2.4% higher. The materials group gained 0.5%.
(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Dan Grebler)
Fund Managers See Stocks Outperforming Bonds Despite Economy – Bloomberg
Gently, but steadily, economic expectations are coming down. It may be an overreaction to the wave of Covid-19 caused by the delta variant, or it may be a response to incoming data, or it could reflect dampening hopes for an expansive new fiscal policy in the U.S. as the standing of President Biden also dampens. But for whatever reason, hopes for a big new “reflation” or even a post-Covid “reopening” have dwindled.
One thing remains unchanged by this, however. The great majority of investors are still convinced that there is no alternative to stocks. Even with drabber economic growth in prospect, which should help fixed-income more than equities, the overwhelming consensus still calls for stocks to outperform bonds.
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