Housing Finally Breaks Free

Central banks support the market in quiet week

Equities pushed higher last week, as the Dow Jones Industrial Average gained 1.0% and the S&P 500 Index closed up 1.2%.

Economic data was relatively light, but positive sentiment from the previous week’s labor report encouraged further buying in equities. Over the course of last week, data on labor markets and consumer credit painted a picture of a steady economy, while interest rate cuts by central banks globally fueled additional sentiment gains.

Consumer credit for March posted an $8.0 billion increase, led entirely by gains in non-revolving credit. It was the 19th consecutive month of gains in consumer credit, but the vast majority of the gains in that time occurred in the non-revolving component (primarily student loans). Consumers were less inclined to rely on credit cards last month for spending, with the revolving credit component falling $1.7 billion in March. In the past year, revolving credit is up a slight 0.5%, reflective of consumers’ unwillingness to spend through credit.

Source: Barclay’s

Labor markets received another bit of good news last week when it was reported that initial claims for unemployment insurance fell to 323,000 for the week ending May 4. That is the lowest reading since early 2008 and represents a continuation of the improvement trend seen for the past several quarters. Using the 4-week moving average, claims are at the lowest point since November 2007.

Source: Haver Analytics

Globally, a number of central bank actions last week led to improved performance in emerging markets. According to Central Bank News, there were eight policy moves last week, as central bankers from Kenya to Poland cut rates. In aggregate, there were 550 basis points worth of cuts. The two most notable changes last week were in Australia and Korea, where rates were each reduced by 0.25%.

Housing finally breaks free

Housing, which for so many years represented everything bad about the credit crisis, is finally beginning to have its day back in the sun. Trends in housing markets around the country are improving, to the benefit of the overall economy. It appears that trend is set to continue.

A good example of the improvements occurring in the housing sector is apparent in existing and new home sales. After bottoming out below 3.5 million homes sold in mid-2010, the pattern to recovery was volatile, but beginning in that year, things began to stabilize. Existing home sales grew over the next two and half years to more than 4.9 million and shown little occasion of weakness.

One of the larger overhangs in the market was the number of delinquencies and foreclosures. Even there, things are improving. Calculated Risk Blog recently highlighted that the number of mortgage delinquencies declined from more than 14% in 2010 to less than 11% more recently.

Source: Calculated Risk

Initially, borrowers were walking away from homes, but recent housing programs encouraged homeowners to refinance into a more affordable payment schedule. That is apparent in the weekly Mortgage Bankers Association (MBA) survey showing the number of mortgage applications. Since the start of 2011, mortgage applications more than doubled on a weekly basis, with the preponderance of that activity occurring for refinancing, as opposed to initial purchases.

Source: Haver Analytics

As things improve, some strategists are raising the possibility that housing markets are re-entering bubble territory. Low interest rates, along with an influx of investors to the space is driving prices higher and limiting availability inventory. Despite that fear, consumers are feeling more confident in buying a home. A Conference Board survey revealed that 5.6% of consumers are planning to buy a house in the next six months, near the higher end of the survey range for the past four years.

Source: Wells Fargo

Many people understand that housing prices are lower than pre-crisis, which leads them to assume affordability has increased. That assumption is accurate, and data from the National Association of Realtors suggest affordability has never been higher.

The Housing Affordability Index reads at 192 currently. When the index is at 100, it implies that borrowers have exactly enough income to qualify for a mortgage based on a median-priced home. At 191, the index suggests the median borrower has 191% of the income necessary to qualify for a conventional loan with 20% down.

Graph of Housing Affordability Index (Composite)

Source: Federal Reserve Bank of St. Louis

Housing was a key component of the recession in 2008, and many wondered if housing would ever return to its glory years. While a return to the glory years is an unlikely event, housing is beginning to turn the corner and support the overall economy. There are numerous reasons to believe housing will remain stable in the quarters ahead, bolstering confidence and improving economic prospects.

The week ahead

Economic and news releases pick up this week, including US retail sales, Chinese retail sales, US industrial production, US housing starts, Japanese GDP, and US consumer sentiment.

The number of central banks meeting hits a pause this week, with only five scheduled to congregate. The meetings of note occur in Thailand, Indonesia, and Turkey.

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