Real Estate News, Analysis and Commentary in West Michigan & Lakeshore

February 7th, 2018 3:22 PM
Economic news for the month of January started out uneventful as markets continued their upward patterns that were typical for the fourth quarter of 2017.

The stock market hit fresh highs on January 26th 2018, closing at 26,604 points for the first time.  These patterns, however, changed abruptly on January 30th, 2018 when the market experienced a correction of nearly 400 points.  The correction further took hold over the next few trading sessions and, after having the worst one-day point drop in history, The Dow finally closed at 24,334 points on February 5th, 2018.   This brief period ended with the equity markets declining by nearly eight percent.

The correction in the equities market came as no surprise to real estate appraisers and market experts who’ve kept a close eye on the ever-flatting yield curve between the ten-year, five-year and two-year Treasury notes.  A flattening yield curve has historically been an early indicator of a pending recession.  It was speculated that if bond yields would continue to rise they would apply pressure to equity markets and money with flow into bonds seeking a more consistent and favorable yield.  It is important to note that the S and P 500 average dividend rate for December of 2017 was 1.85 percent.  The ten year bond yield reached as high as 2.883 percent in January and the five year note went as high as 2.56 percent. These levels in treasury yields have not been seen since 2014.  Many bond experts have warned that a 30-year Treasury bond yield over 2.7 percent could be trouble for equity and housing markets.

As the bond yields increased throughout January, mortgage interest rates increased as well.  It is uncertain if the ten year bond will continue a push to three percent level however, in a recent Bloomberg Markets article Mr. Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York said, “You have to watch the 3 percent level, there is a magnetic force there to some extent that will pull the yield to test that. But we have supply next week and we need to see if buyers come in.”  It must be stated that the Ten Year Treasury yield has an impact on mortgage rates and can have a direct impact home prices and values.  

Wage gains for January were the biggest in more than a decade and added to some bearish speculation that U.S. inflation expectations would continue to increase.  These increasing inflation targets should continue to support growing confidence that the Federal Reserve is on course to raise interest rates at least three times in 2018, if not more.

Janet Yellen exited her position as Chairperson of the Federal Reserve on February 2nd 2018 as the market closed 666 points down for the day.  In her parting remarks she made statements about equity markets being overvalued, "I don't want to say (equities) are too high”, she said, “But I do want to say high. Price/earnings ratios are near the high end of their historical ranges."  She also added comments concerning commercial real estate that valuations were “quite high” compared with rents.  "Now, is that a bubble or is too high…there, it's very hard to tell. But it is a source of some concern that asset valuations are so high.”

The Bureau of Labor Statistics reported the national unemployment rate in January was 4.1 percent.  This would be the fourth straight month at this level and the national labor participation rate remained overall unchanged at 62.7 percent.
Consumer confidence fell in December, however, reversed course in January.  The Conference Board by Nielsen presented the following statement after their most recent Consumer Confidence Survey®., “Expectations improved, though consumers were somewhat ambivalent about their income prospects over the coming months, perhaps the result of some uncertainty regarding the impact of the tax plan,” Lynn Franco, director of economic indicators at the Conference Board, said in the statement. “Consumers remain quite confident that the solid pace of growth seen in late 2017 will continue into 2018.” 

The American savings rate for December 2017 dropped once again to 2.4 percent continuing to show the weakest level since December 2007.  The Wall Street Journal recently noted that Americans are simply feeling good about their financial lives and that it’s possible that we’ve reached the point in the business cycle where households are now excitedly spending paper gains after taking a look at their stock accounts or checking their home values.  Americans may be feeling better even though they don’t have a lot of extra cash flow.  The Journal’s Grep Ip tweeted; “Americans may think “their assets are doing the saving for them.” Some speculate this trend will change if any additional stock market or real estate correction continues to take place into 2018.  

Existing-home sales subsided throughout most of the country in December, but 2017 as a whole edged up 1.1 percent and ended up being the best year for sales in 11 years, according to the National Association of Realtors®. NAR Chief Economist, Lawrence Yun stated,  “Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand. At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.” Yun also stated, “Closings scaled back in most areas last month for this same reason. Affordability pressures persisted, and the pool of interested buyers at the end of the year significantly outweighed what was available for sale.”

Finally, the cryptocurrency Bitcoin showed extreme price declines in the month of January ending the month at $10,138 as some now speculate the end of what may be the biggest speculative bubble in history.

Overall, the month of January 2018 experienced heightened concerns in the bond markets, increased volatility in US equity markets, sluggish housing sales, and more American decreasing their personal savings and increasing spending based on confidence in their “paper assets.”

November 7th, 2017 6:08 AM

Much of the economic activity for the month of October can be summarized in one word…”Uptrend”. The United States stock market reached new highs during the month based primarily on companies’ earnings reports. Edward Jones Investing reported the following information, “U.S. large-cap stocks edged higher, reaching record levels for the seventh week in a row. These gains came in what was the busiest week for earnings in the quarter. Several large-cap technology stocks reported solid earnings, pushing the NASDAQ up 2.2%.” These markets have been in an uptrend throughout 2017.

According to ADP National Employment, job growth was higher than expected with the US private sector adding 235,000 jobs in October versus the 200,000 anticipated wage inflation remained somewhat stagnate.

Consumer optimism continued to increase in October. The Conference Board by Nielsen presented the following statement after their most recent Consumer Confidence Survey®. “Consumer confidence increased to its highest level in almost 17 years (Dec. 2000) in October after remaining relatively flat in September,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions improved, boosted by the job market which had not received such favorable ratings since the summer of 2001.

Consumers were also considerably more upbeat about the short-term outlook, the prospect of improving business conditions as the primary driver. Confidence remains high among consumers, and their expectations suggest the economy will continue expanding at a solid pace for the remainder of the year.” It is also important to note that Jeff Cox with CNBC reported the following, “Americans are saving at the slowest pace in nearly 10 years, a sign of growing confidence as money pours into risk. The savings rate in September fell to 3.1 percent, according to Commerce Department data. That’s the weakest level since December 2007, just as the U.S. economy was entering the worst of the financial crisis amid the Great Recession.”

The bond market witnessed increased activity as well, the U.S. Ten Year Treasury Rate increased to 2.46 percent to end the month at 2.37 percent. This uptrend in the bond market was further solidified with a statement from Mathew Graham, Chief Operating Officer of Mortgage News Daily proclaiming in an article from October 26, 2017, that Thomson Reuters MBS indicated bond yield activity with the headline, “It’s an Uptrend!” These upward moving trend lines have been present within the bond market since the summer and some are calling it the most important economic story being reported.

On Bloomberg Markets, “DoubleLine Capital LP’s Jeffrey Gundlach called it “the moment of truth” for the bond market’s three-decade bull run after yields broke through 2.4 percent. Bill Gross at Janus Henderson Group said this month that a sustained move through that level would signal the end of the 30-year rally”. It must be stated that the Ten Year Treasury yield has a direct impact on mortgage rates and can impact home prices and values. The impact is greater as housing affordability continues to be a concern for most housing experts. Many economists speculate that the U.S. Federal Reserve with stay on track for a December 2017 rate hike as well.

Buyer demand also remained strong within most markets according to the National Association of Realtors; however, supply problems continue to be a concern. The Pending Home Sales Index, a forward-looking indicator based on contract signings, was at 106.0 in September (unchanged from a downwardly revised August figure). The index is now at its lowest reading since January 2015.

“Demand exceeds supply in most markets, which is keeping price growth high and essentially eliminating any savings buyers would realize from the decline in mortgage rates from earlier this year,” said Lawrence Yun, NAR chief economist, “While most of the country, except for the South, did see minor gains in contract signings last month, activity is falling further behind last year’s pace because new listings aren’t keeping up with what’s being sold.” He continued, “Buyers looking for a little relief from the stiff competition from over the summer may, unfortunately, be out of luck in the coming months,” said Yun. “Inventory starts to decline heading into the winter, and many would-be buyers from earlier in the year are still on the hunt to find a home.”

Overall, the month of October 2017 marked an uptrend in consumer confidence, employment, bond yields, the U.S. stock markets, and continued housing demand.

Copyright©2017 Phil Crawford. All Rights Reserved.

Posted by Thomas Markoski on November 7th, 2017 6:08 AMLeave a Comment

Subscribe to this blog

December 7th, 2016 4:20 PM