Conflicting messages challenge rosy outlook
Market Point of View from New Oak Risk Advisory and Financial Services
“Existing home sales are signaling a different message than home builders confidence, new-home purchases and direction of home prices,” says Ron D’Vari, CEO and Co-Founder of NewOak.
The July home sales at 394,000 annualized pace was certainly surprised the market on the negative side. The reported number was lower by more than seven times historical standard deviation between the poll’s forecast (487,000 annualized) and the actual reported outcome. Paradoxically at the same time, the adjusted new-home purchases were higher in July by 6.8% over the same period in 2012. The July median home prices also increased 8.3% over 12 months ago.
Despite the spike in mortgage rates, the general sentiment is that home prices and housing demand will be on the rise with an improving job market and consumer confidence. Supply of homes are also expected to remain in check with tight inventory, constrained construction resources, and less willing sellers. Hesitant home buyers are more and more willing to go on home purchase hunt and seem to be able to afford higher prices and rates.
While Fed is bound to start tapering down QE 3 soon, mortgage rates already reflect most of that if not already over done. The U.S. housing market, employment and consumer confidence will remain highly interdependent but expected to improve gradually given current overall economic dynamics. However, a bigger puzzle will be how GSEs are restructured and government housing policies are redefined.
Fed Policies: Coordination not Acceleration?
“All the talk and signaling of the Federal Reserve’s near-term tapering of its monetary stimulus resulted in a selloff of highly rated securities and also dealt a blow to the stocks and currencies of a number of emerging countries,” says James Frischling, President and Co-Founder of NewOak.
The Fed’s unprecedented quantitative easing has been the key driver of the recovery in US equity markets It has also resulted in significant capital inflows into emerging countries. The risk-on trade was the right call in the face of the coordinated efforts among central banks to flood the financial markets with capital in order to keep interest rates low and provide ample liquidity. With a change of course looming, investors are understandably pulling back in the areas that were the primary beneficiaries of the easy money.
The Fed was the leader of what proved to be a globally coordinated effort to confront the financial crisis. There’s no reason to believe that the Fed won’t again lead the effort to end these highly accommodating policies.
But each country has its own domestic needs and agenda. While preventing a far greater financial collapse was the reason behind the unprecedented global stimulus, reversing course in order to prevent future asset bubbles isn’t something that is universally agreed upon.
The Federal Reserve will continue to talk and signal a reduction in its bond buying program, but the economic data will ultimately determine the timing and speed of the tapering. Countries that benefitted from the flat US yield curve will have to adjust to the Fed signaling and ultimately implementing less accommodating policies.