Posts Tagged ‘Housing’

China’s Real Estate Free Fall May Not Bode Well For Commodities

June 21st, 2010 Michael McDonough Comments off

China’s plummeting real estate transactions could spell trouble for domestic steel and cement industries.  The average number of real estate transaction in China’s 15 largest cities fell 75% on an annual basis according to the most weekly June release according to Goldman Sachs.  On a ytd basis transactions have declined -29%.  The Chinese government has been attempting to cool the overheating sector, in the face of mounting inflation and a more hawkish tone on monetary policy.  According to the China Daily, quoted by Bloomberg, “Apart from one villa development, no residential project obtained a sales license last week and no new residential buildings were put on the market over the weekend.”  One of the primary reasons for the decline is more stringent government policy making it more difficult to receive a second mortgage, coupled with concerns over future policies that have buyers taking a wait and see approach.  The government relied on the domestic economy, including the real estate sector to strengthen growth during the global financial crisis. 

One potentially significant international implication of a slowdown in the Chinese real estate sector is that the country’s construction industry consumes half of the nation’s steel and 36% of its aluminum.  China’s insatiable demand for natural resources has been a major crutch for the commodities industry as demand from the remainder of the world remains tepid at best.  For example in 2009 China consumed 65% of the world’s iron ore exports.  Therefore, any slowdown in Chinese demand for natural resources could have an adverse impact on the commodities sector, and continue to depress shipping companies still at the mercy of China’s whim.  To get a visual on just how significant Chinese demand for natural resources has been please see this piece from Bloomberg’s Interactive Insight team:

Categories: Asia/China Tags: , ,

Purchase Aps Hit 13Y Low as Tax Credit Expires

May 26th, 2010 Michael McDonough Comments off

Not since June 2008 has the housing sector been completely devoid of some form of tax incentive to help bolster sales, until now that is and it shows.  MBA purchase applications have taken a precipitous drop over the past two weeks falling to levels not seen since the end of 1997.  The government’s approach of bolstering current sales by borrowing from the future sales appears to have worked, and now it’s time to pay the piper.  Headwinds for the sector remain strong generated by stiff credit conditions, high unemployment, increasing foreclosures, large inventories of vacant homes, and a lack of tax credits; while tailwinds are slowing to a breeze.  A robust recovery in housing during 2010 is extremely unlikely.

  MBA Purchase Applications


Housing Recovery: To Remain a no Show in 2010

May 12th, 2010 Michael McDonough Comments off

Now that the extended first time home buyer credit is history, so is whatever impact it once had on home sales.  The good news is that data indicates the extended program had only a modest impact, especially compared to the original incentive; this however is also the bad news.  A recent, albeit modest, jump in home sales in the program’s 11th hour implies some interest in the program, but at levels only a fraction of the original credit’s impact leading up to its ‘would-be’ expiration in November.  As the chart below illustrates, existing home sales rose from a SAAR of 5.10mn units in August to 6.49mn by the would-be expiration in November, after which sales fell off a cliff.  While sales recovered modestly from February’s recent low of 5.01mn units, the lack of any significant impact is clear.  A spike in March’s pending home sales should help support home sales for at least another month, but beyond that sales will likely remain tepid, despite near record affordability.

Source: Bloomberg

Looking at a more ‘real-time’ housing indicator, MBA purchase applications (released this morning) rose marginally leading up to the expiration of the extended tax credit, but have since begun to recede.  Notice the flatness of purchase applications between November 2009 and March 2010, highlighting the general lack of interest in the new program.

Source: Bloomberg (rebased)

The combined effects of lukewarm demand, and a massive supply of vacant homes in the market will likely continue to be a drag—or at least not add any growth—to residential investment (a GDP component) for the remainder of the year.  This will hamper the strength of the current recovery, which will have to rely heavily on inventory rebuilding and business spending.  Upside risks to this forecast exists if stronger than expected consumption leads to more significant hiring.  However, over the quarters ahead fiscal stimulus will turn fiscal drag stirring up headwinds growth will be forced to overcome.


Mortgage Rates Begin To Climb

April 7th, 2010 Michael McDonough Comments off

As expected mortgage rates have begun to climb.  On March 31st, as planned the Fed terminated its mortgage backed securities (MBS) purchase program after buying $1.25trn of the instruments–keeping mortgage rates artificially low.  According to the Mortgage Bankers Association (MBA), the average rate for a 30Y mortgage already climbed to 5.31%  the week ending 4/2, compared to 5.04% a week earlier.  I expect rates will continue to climb peaking somewhere between 5.5% and 6.0%, before leveling off.  This will of course but a strain on any housing recovery.  The chart below highlights the Fed’s net MBS purchases and 30Y mortgage rates:

Source: Bloomberg


Pending Home Sales Point Toward Continued Trouble for Housing

March 4th, 2010 Michael McDonough Comments off

Pending home sales, generally considered a good leading indicator for final home sales fell -7.6% in January, supporting recent weakness in both existing and new home sales.  This result was well below the consensus forecast calling for a monthly increment of 1.8%.  This data reiterates my view that that the housing recovery will face significant headwinds over the months ahead as interest rates begin to rise and the newly extended home buyer tax credit proves to be impotent in bringing new buyers into the market.