The already struggling U.S. housing market recovery took it on the chin this week…
While most investors were focused on the collapsing stock market, courtesy of the Fed’s announcement Wednesday that it would pull back on its $85.0-trillion-a-month paper money printing program some time later this year, bond yields rose sharply.
The yield on the bellwether 10-year U.S. Treasury bill has jumped almost 50% over the past 12 months—and that means mortgage rates are rising sharply. This should be of no surprise to my readers, as I have been warning about higher interest rates for some time now. (See “Gone Are the Days When the U.S. Bond Market Was the Place to Be.”)
If there is one factor that affects activity in the housing market the most, it is interest rates. That’s why the nail in the coffin for the housing market might now be in.
The National Association of Realtors reports first-time home buyers accounted for only 28% of all the existing-home purchases in the U.S. housing market in May. What’s even more troubling is that they have been declining in number. In April, first-time home buyers accounted for 29% of purchases; and in the same period a year ago, they bought 34% of all existing homes in the U.S. housing market. (Source: National Association of Realtors, June 20, 2013.)
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Looking forward, I won’t be surprised to see the number of first-time home buyers decline even further, because the Federal Reserve has pulled the rug right out from under their feet by saying it may pull back on its quantitative easing later this year, thus pushing mortgage rates sharply higher.
The standard 30-year fixed mortgage rate jumped to 4.24% today, up from only 3.67% a month ago.
As I have been writing, the U.S. housing market has been propped up this year by institutional investors moving in and buying single-family homes for the sole purpose of renting them out—for investment purposes. Institutional investors became major buyers of single-family homes in key areas of the U.S. housing market and even bid up prices.
But now that yields across the board are rising, is the housing market that attractive to institutional investors? Money flows to the highest and safest returns. With rates rising, the big-money guys might finally have other investment alternatives to look at. Combine less focus on the housing market from institutional investors with declining demand from first-time buyers and rising interest rates, and quickly the housing recovery becomes a has-been.
The so-called “powerhouse” of the global economy, China is witnessing an economic slowdown like never before—the repercussions of which will be felt here in North America.
The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) continued its slide in June, registering 48.3—a nine-month low—compared to 49.2 in May. (Source: Markit, June 20, 2013.) Any number below 50 suggests contraction in the manufacturing sector.
China is a leading indicator of the global economy, because it exports a significant portion of its products worldwide. If manufacturing in China declines, it suggests the economic hubs of the global economy aren’t really buying much.
Similarly, Germany, the fourth-biggest economy in the global economy, is also facing dismal economic conditions. The country’s Flash Manufacturing PMI declined to a two-month low in June, standing at 48.7 compared to 49.4 in May. (Source Markit, June 20, 2013.)
And Russia seems to be headed towards an economic slowdown as well. The International Monetary Fund (IMF) has slashed its growth forecasts for the country. The IMF expects the Russian economy to grow only 2.5% in 2013, and 3.25% in 2014. I think the IMF is way off with both estimates—we see growth coming in much lower for Russia this year and next.
As an economic slowdown in the global economy emerges, we are seeing U.S.-based companies report weak demand. Caterpillar Inc. (NYSE/CAT), the big construction and mining company, reports that in the last three months ending in May, its total machine retail sales in the global economy fell seven percent from the same period a year ago. Caterpillar’s retail machine sales declined in every region of the global economy except for Latin America! (Source: Bloomberg, June 20, 2013.)
Caterpillar’s retail sales declining in the global economy may just be the beginning of what may become the norm for second-quarter earnings results for other large American multinational companies—weak revenue.
My opinion hasn’t changed; the global economy is treading in dangerous waters. Very few in the media are covering this story. It’s a global economy: if China, the eurozone, Japan and other big economies are all facing soft demand from their consumers and businesses, big American companies operating in these countries will eventually feel the pain as well. That pain will eventually make its way to the stock prices of those companies.
What He Said:
“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in Profit Confidential, June 2, 2005. Michael recommended Google Inc. (NASDAQ/GOOG) as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached US$700.00 per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.