Last night I was playing Jenga with my six year old twin grandsons. Because hedging the markets is my job, I tend to see financial metaphors all around me. Our family fun time was no exception.
In Jenga, as you probably know, each removed block is placed on top of the tower, creating an increasingly unstable structure. The game is over when the tower collapses, caused either by a block being removed or being placed atop the structure again. The last player to complete a round before the collapse is the winner.
Playing Jenga with the kids, I thought to myself: will the housing sector be the last block that will bring down the vulnerable recovery? I’m not saying we’ll see anything as dramatic as the subprime mortgage calamity of 2008. But new housing statistics this week underlined the weakness of a faltering economy.
Home is where the wealth is…
U.S. stocks ended higher on Thursday in volatile trading, after the release of the Federal Reserve’s latest open market committee minutes of meetings, which went beyond Wall Street market expectations for the rate hike cycle. The minutes showed half-point increases for June and July.
In pre-market futures on Thursday, indices were little changed as investors awaited crucial economic data slated for release later this week, including pending home sales (Thursday); and Personal Consumption Expenditure (PCE) and Consumption Expenditure (Friday).
The PCE is the Fed’s preferred inflation indicator. Brace yourself for some market-changing inflation data just in time to possibly ruin your Memorial Day weekend.
Read this story: Watch out for bear market rallies
Despite short-lived recoveries, investor fear persists over signs of slowing economic growth. The Fed’s increasingly hawkish monetary policy is driving up borrowing costs for individuals and businesses. The Fed is trying to contain inflation without killing the recovery, a feat known as the “soft landing”. But for the US central bank, making such landings is rare.
The greatest asset for most Americans is a home, and buying one is getting more and more expensive. The rate of a 30-year fixed loan fluctuates at 5.27%, against 3.29% at the start of the year.
Housing sector reports are leading indicators and as such they come under scrutiny from investors. Leading indicators provide early indications of economic trends, and stock market analysts are clamoring for any signal as to what the future may hold.
Housing trends also exert a multiplier effect across the economy. And right now, the trends are worrying. Sales of new single-family homes in the United States fell for the fourth straight month as potential buyers grappled with a confluence of discouraging factors.
According to the data jointly published On May 24 by the US Census Bureau and the US Department of Housing and Urban Development, new home sales fell to a seasonally adjusted annual rate of 591,000 in April, the lowest since April 2020, when the coronavirus pandemic COVID was at its worst (see chart).
Sales of new homes fell 16.6% in April as house prices continued their strong upward trajectory. The median price of new homes sold in April hit a record high of $450,600, marking a year-over-year increase of 20% and more than 45% from April 2020. The average sale price is even higher, at $570,300.
Add to that the spike in non-housing costs and you have a scenario in which consumers could get discouraged and cut spending.
About three-quarters of the US economy is consumer spending, which is heavily dependent on sentiment. A pillar of consumer sentiment is the state of the housing market. Certainly, Americans who already own a home feel richer. But potential buyers are being ruthlessly shut out of the market, which is demoralizing for people who want their share of the American dream.
The resilient consumer helped prevent the stock market correction from turning into a crash. But history shows that the housing industry has been the source of consumer pain that has led to financial routs.
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John Persinos is the editorial director of Invest daily.