Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘housing market’

Setting Up for the Slaughter

By for Profit Confidential

Stock Market Valuations Touching Historical ExtremesInvestors poured $4.3 billion into the SPDR S&P 500 (NYSE/SPY) last week, an exchange-traded fund (ETF) that tracks the S&P 500. For the week, ETFs tracking U.S. equities witnessed the most inflows in the last four weeks. (Source: Reuters, July 17, 2014.)

And as investors continue to inject vast sums of money into the stocks, stock valuations are at historical extremes. When I want to see how expensive the stock market is getting, I look at the S&P 500 Shiller P/E multiple (the value of stocks compared to what they earn adjusted for inflation)…and it’s screaming overvalued.

In July, the S&P 500 Shiller P/E stood at 25.96. That means that for every $1.00 a company makes, investors are willing to pay $25.96. The stock market has reached this P/E valuation (25.96) only seven percent of the time since 1881.

The number suggests the stock market is overvalued by 57%, according to its historical average of 16.55. (Source: Yale University web site, last accessed July 18, 2014.) The last time the S&P 500 Shiller P/E was above the current level was in October of 2007—just before one of the worst market sell-offs in history.

But this isn’t the only indicator suggesting the stock market is overvalued.

Another indicator of stock market valuation I look at is called the market capitalization-to-GDP multiple. Very simply put, this indicator is a gauge of the value of the stock market compared to the overall economy. It has been a good predictor of where key stock indices will head.

At the end of the first quarter of this year, the Wilshire 5000 Full Cap Price Index … Read More

Why Higher Interest Rates Will Become a Necessity

By for Profit Confidential

A Weak Economy Masked By an Artificial Stock Market RallyLet’s start with the U.S. housing market. Has the recovery for it ended or just stalled?

My answer comes in one sentence: While it’s always a matter of location, only the high-end housing market is doing well, while the general market is weak.

I can see it in the mortgage numbers. People just aren’t taking loans to buy homes in the U.S. economy. In fact, mortgage applications are tumbling.

In the second quarter of 2014, Bank of America Corporation (NYSE/BAC) funded $13.7 billion in residential home loans and home equity loans—down 49% from a year earlier, when it funded $26.8 billion in similar loans. (Source: Bank of America Corporation, July 16, 2014.)

JPMorgan Chase & Co (NYSE/JPM) originated $16.8 billion in mortgages in the second quarter (ended June 30, 2014)—down 66% from a year ago. (Source: JPMorgan Chase & Co., July 15, 2014.)

And Wells Fargo & Company (NYSE/WFC) also reported a massive decline in mortgage originations. In the second quarter of 2014, it originated $47.0 billion in new mortgages—down 62% from the second quarter of 2013. (Source: Wells Fargo & Company, July 11, 2014.)

So even though interest rates continue at a record low, people are not borrowing to buy homes in the U.S. economy.

But it’s not just the housing market that is weak. The entire U.S. economy is soft…masked by an artificial stock market rally and skewed “official” government statistics that don’t give us a true picture of the unemployment situation or inflation.

We’ve all heard by now that Microsoft Corporation (NASDAQ/MSFT) is planning job cuts of almost 20,000. (Source: USA Today, July 15, 2014.) … Read More

Three Housing Market Indicators Yell “Trouble Ahead”

By for Profit Confidential

Next Shoe May Be Dropping the U.S. Housing MarketThe U.S. housing market is in trouble again, and as crazy as it sounds, it won’t surprise me to see home prices decline soon.

Here are three reasons why:

Existing-home sales have been declining since July of last year. The annual rate of existing-home sales in July of 2013 was 5.38 million. In April of this year, this rate fell to 4.65 million. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 22, 2014.)

Mortgage originations in the U.S. housing market have been falling consistently, as illustrated by this chart:

Mortgage Originations, U.S. Housing Market

Quarter

Mortgage Originations

Q3 2013

$549 Billion

Q4 2013

$452 Billion

Q1 2014

$332 Billion

Data source: Federal Reserve Bank of New York web site,
last accessed May 22, 2014

Between the third quarter of 2013 and the first quarter of 2014, mortgage originations in the U.S. economy declined by 40%. Mortgage originations at U.S. banks in the first quarter of 2014 were the lowest since the third quarter of 2011!

Then there is the National Association of Home Builders/Wells Fargo Housing Index (HMI). This index tracks the confidence of homebuilders in the U.S. housing market. It’s telling us that the recovery talk is based on nothing but false hope. The HMI dropped to its lowest level in 12 months in May of this year. (Source: National Association of Home Builders, May 15, 2014.)

Dear reader, I know I have had a bearish stance on the U.S. housing market for some time now. Those concerns are starting to materialize in the marketplace. Don’t buy into what the mainstream says, that all is … Read More

2014: Year the Frail U.S. Housing Market Recovery Reverses?

By for Profit Confidential

What the Collapse in Homeownership Is Telling Us About the Housing MarketLooking at the current state of the U.S. housing market, one could say, “It’s the perfect time to buy a home.” Mortgage rates are historically low. Home prices are still down significantly from their peaks in 2006. But unfortunately, potential homeowners are not coming into the housing market.

The reality of the U.S. housing market is that it never recovered. It’s still sick at heart. Low mortgage rates and low home prices definitely provided some support; but now, as the Federal Reserve is pulling back on quantitative easing and mortgage rates are rising, we see home buyers running away.

The biggest bump we saw in housing was in 2012, when institutional investors came in and bought billions of dollars worth of empty homes in bulk. This gave the mainstream a hope that there was going to be a recovery in the housing market.

But as I have been writing since last year, investors buying houses to rent them will not create a healthy housing market recovery.

In fact, in the first quarter of 2014, the homeownership rate in the U.S. declined to its lowest levels in almost two decades, falling to 64.8%. (Source: U.S. Census Bureau, April 29, 2014.)

New-home sales are declining at a very ridiculous rate, further strengthening my argument that home buyers are just tapped out. The chart below is of new-home sales in the U.S. going back to 2005.

Houses Sold - New One Family Chart

Chart courtesy of www.StockCharts.com

Back in 2005, the annual rate of new homes sold in the U.S. housing market was about 1.2 million. In March of this year, this rate was just 384,000. And in 2014, … Read More

When the Cows Go Out for Slaughter a Second Time

By for Profit Confidential

When the Cows Go Out for Slaughter a Second TimeDid you see this story in the Wall Street Journal last Friday?

“Retirement investors are putting more money into stocks than they have since markets were slammed by the financial crisis six years ago… Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March… That is the highest percentage since March 2008…” (Source: Wall Street Journal, May 2, 2014.)

You read that right. With stocks at a record-high (and valuations stretched), retirees are pouring back into stocks. Are they getting ready to get slaughtered again? I believe so.

If you are a long-term reader of Profit Confidential, you know my take: the “bear” has done a masterful job at convincing investors the economy has recovered and the stock market is a safe place to invest again. Meanwhile, nothing could be further from the truth.

We are living the slowest post-recession recovery on record. And that recovery has been manipulated by the tampering of the Federal Reserve. You see, the Federal Reserve played a key role in driving the key stock indices higher. In 2009, in the midst of a financial crisis, the central bank started printing money and buying bonds. This resulted in lower bond yields. Those who had money in bonds, who had essentially paid nothing, moved into stocks.

And those record-low interest rates enabled companies in the key stock indices to borrow money and issue new equity, using the money to buy their own stock, thus pushing up per-share corporate earnings.

The end result? 2013 was a banner year for stocks on the key stock indices. But as 2014 came around, we began … Read More

What the Collapse in Homebuilder Stocks Forewarns

By for Profit Confidential

Proof U.S. Housing Market Losing MomentumThe housing market that lured institutional investors in during 2012 and 2013 is showing signs of cracking.

Before I go into more detail, you have to keep in mind that affordability is the key to the housing market and affordability for housing only increases once home buyers’ wages increase. Right now, incomes in the U.S. economy are declining. And you can add to the problem the fact that mortgage rates have been rising, too, putting further pressure on affordability for home buyers.

Last week, the chief economist of the California Association of Realtors said, “Housing affordability is really taking a bite out of the market… We haven’t seen this issue since 2007.” (Source: “Southland home prices surge but sales plummet,” Los Angeles Times, April 15, 2014.)

Zillow, Inc. (NYSE/Z), a real estate information company, expects home values in more than 1,000 U.S. cities to be more expensive than ever within the year. The chief economist at the firm said, “The lows of the housing recession are becoming an increasingly distant memory as home values reach new highs and homes become more expensive than ever in many areas… As affordability worsens, more residents will be forced to search for affordable housing farther from urban job centers, and home values in some areas may have to come down.” (Source: “Home Values in More Than 1,000 U.S. Cities Expected to Be More Expensive than Ever Within the Next Year,” Zillow, Inc. web site, April 22, 2014.)

Don’t get me wrong. The U.S. housing market has definitely improved since the Credit Crisis of 2008. But, as I have been writing, it is not … Read More

U.S. Economy to Enter Recession in Next 12 Months or Less

By for Profit Confidential

Consumer Spending Telling Us About U.S. EconomyAn economy is said to be technically in a recession when it experiences two consecutive quarters of negative gross domestic product (GDP) growth.

The biggest portion of the U.S. GDP calculation is consumer spending; then comes investments, government spending, and, finally, net of exports. By far, consumer spending is the biggest factor in calculating GDP. All you need is a slight decline in consumer spending for GDP to fall.

And as it stands, consumer spending in the U.S. economy is on the decline. In 2013, it accounted for nearly 70% of GDP, meaning that for every $1.00 increase in GDP, $0.70 was associated with consumer spending.

Since November, consumer spending for durable goods (goods that can last for a long time, like a T.V. or furniture) declined by 3.23%. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 22, 2014.)

When we look at sales at retailers in the U.S. economy, they keep telling the same story: U.S. consumers are tapped out. Of 175 retailers tracked by FactSet, more than half of them have reported store sales in the fourth quarter of 2013 that were below market expectations. (Source: FactSet, April 11, 2014.)

So far, for the first quarter of 2014, 20 of the major retailers have provided negative guidance regarding their sales and only nine have issued positive guidance. For the entire 2014 year, 31 retailers have issued negative guidance about their sales and only 15 have issued positive guidance. (Source: Ibid.)

There is a clear sign of declining retail sales. In 2011, same-store sales grew by 2.9%; in 2012, they increased by 2.6%; … Read More

Dead-Cat Bounce Over for the Housing Market?

By for Profit Confidential

Momentum Housing Market Shows Clear Signs EasingI have been saying this for a while: You can’t have a housing recovery unless actual home buyers are involved.

We are very far away from seeing the housing market reach its 2005 highs…and as time passes, it becomes clearer that this generation may never see them again.

How can I say that?

What we have seen in the housing market since then, but mostly since 2012, in my opinion, is nothing more than a dead-cat bounce scenario—an increase in prices after a massive decline. The chart below shows how far off we are from the housing prices of 2005.

S&P Case - Shiller Home Price Chart Chart courtesy of www.StockCharts.com

One of the key indicators I follow in respect to the state of the housing market is mortgage originations. This data gives me an idea about demand for homes, as rising demand for mortgages means more people are buying homes. And as demand increases, prices should be increasing.

But the opposite is happening…

In the first quarter of 2014, mortgage originations at Citigroup Inc. (NYSE/C) declined 71% from the same period a year ago. The bank issued $5.2 billion in mortgages in the first quarter of 2014, compared to $8.3 billion in the previous quarter and $18.0 billion in the first quarter of 2013. (Source: Citigroup Inc. web site, last accessed April 14, 2014.)

Total mortgage origination volume at JPMorgan Chase & Co. (NYSE/JPM) declined by 68% in the first quarter of 2014 from the same period a year ago. At JPMorgan, in the first quarter of 2014, $17.0 billion worth of mortgages were issued, compared to $52.7 billion in the same period a year ago. … Read More

Movie Tickets and New Homes: Why They Are Both in Trouble

By for Profit Confidential

The Untold Story of the Pinned-Down U.S. ConsumerIn 2013, consumer spending accounted for 67% of U.S. gross domestic product. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 2, 2014.) It’s plain and simple: economic growth cannot be achieved unless consumers are spending.

And unfortunately, higher prices and lower discretionary spending are putting the brakes on consumer spending here in 2014.

The Motion Picture Association of America says box office sales in the U.S. economy came in at $10.9 billion in 2013—up only one percent from 2012 and up just three percent from 2009. But here comes the kicker: the sales increase was due to higher ticket prices. The number of tickets sold for Hollywood movies in 2013 was down 1.5% from 2012 and six percent from 2009! (Source: Motion Picture Association of America, Inc., March 25, 2014.)

And the U.S. housing market is getting into trouble, too, as consumer spending pulls back. The chart below is of new-home sales in the U.S. economy from the spring of 2012 until now.

Houses Sold - New One Family ChartChart courtesy of www.StockCharts.com

You will quickly see from the chart that new-home sales in the U.S. economy peaked in late 2012/early 2013 and have come down since. Existing-home sales are also under stress and well below their post-Credit Crisis peak.

Why does the housing market matter? When homebuyers move into their new homes, they buy things like lawnmowers, appliances, furniture, and more. With home sales declining, it suggests consumer spending on these items will not be robust in 2014.

Dear reader, consumer spending patterns in the U.S. economy show troubling trends in the making. Sure, I talked today about how movie tickets … Read More

The Stock Market Needs to Do This in 2014 Before I Invest More in It

By for Profit Confidential

Why Investors Need to See It to Believe It in 2014This is an odd stock market. On one hand, you don’t want to miss out on any of the upward moves, which is why you should continue to ride the gains; on the other hand, you also want to make sure you have an exit plan in place. (See “Time for Investors to Create an Exit Strategy?”)

As we move toward the end of the first quarter, the one thing that is clear is the difference in the market behavior this year versus the same time in 2013, when everything was moving rapidly higher with minimal regard for the underlying market fundamentals.

As I wrote in these pages in January, this will be a more difficult market in which to make money compared to the previous few years.

The move by the Federal Reserve under Janet Yellen to continue to dismantle the quantitative easing that was put into place by former Fed Chair Ben Bernanke a few years ago has continued into 2014 with the third straight month of cuts to the central bank’s monthly bond buying.

The gradual $10.0-billion-per-month reduction in the Fed’s monthly bond buying will likely continue until the program reaches zero early in the fourth quarter, unless, of course, the economic renewal stalls.

What this means for the stock market is that the drying up of easy money from the Fed will continue to put a damper on the money available for speculating on stocks, especially those in the emerging markets. And as bond yields rise, there will be more of a shift to bonds.

We are already seeing the impact on the … Read More

Are We Really Headed for Deflation?

By for Profit Confidential

Forget Deflation; Inflation Is Becoming a Big ProblemThe Bureau of Labor Statistics (BLS) reports inflation in the U.S. economy increased by 0.1% in February from the previous month. (Source: Bureau of Labor Statistics, March 18, 2014.) As usual, these numbers have again brought up the theory of deflation—a period when general prices decline.

Reasons for the deflation fear? In 2013, inflation for the entire year was 1.5%. In 2012, it was 1.9%. Going back further, in 2011, it was three percent. If we extrapolate the inflation numbers from January and February of this year and assume the increase will be the same (0.1%) throughout the year, we are looking at an inflation rate of 1.2% for 2014.

Wells Fargo Securities LLC has gone one step further. Economists at the firm believe there’s a 66% chance that deflation in the U.S. economy will prevail and these chances have been increasing since 2010. (Source: Bloomberg, February 21, 2014.)

To me, this is sheer nonsense!

The reality of the matter is that the inflation numbers reported by the BLS exclude changes in food and energy prices—the most important things consumers use on a daily basis. When you include food and energy, inflation is running at a much higher rate.

The prices of basic commodities are skyrocketing. Take corn prices, for example: since the beginning of the year, corn prices are up more than 15%. Wheat prices are up almost 20% year-to-date. When you look at meat prices, such as lean hogs, you will see they have increased by more than 45% since January.

As I see it, deflation is nothing but a farfetched idea for the U.S. economy. (In a … Read More

Why the U.S. Housing Market Is Headed for Trouble in 2014

By for Profit Confidential

The 2014 U.S. Housing Market Recovery That Never HappenedCompared to the past two years, the U.S. housing market will not have a great year in 2014.

In fact, key indicators are now pointing to a top in the housing market recovery:

The National Association of Home Builders/Wells Fargo Housing Market Index fell to 47 in March, coming down more than 16% from 56 in January. (Source: National Association of Home Builders, March 17, 2014.) When this index is below 50, homebuilders view housing market conditions to be poor. This tells me that those who are closest to the housing market—the homebuilders—are becoming concerned.

And existing-home sales are declining. Existing-homes sales in the U.S. housing market fell 7.1% in February from a year ago and registered at the lowest pace since July of 2012. January’s existing-home sales were disappointing, too.

The backbone of any housing market recovery, first-time homebuyers continue to be absent from the recovery. The president of the National Association of Realtors was quoted as saying, “The biggest problems for first-time buyers are tight credit and limited inventory in the lower price ranges… In our recent consumer survey, 56% of younger buyers who took longer to save for a down payment identified student debt as the biggest obstacle.” (Source: “February Existing-Home Sales Remain Subdued,” National Association of Realtors, March 20, 2014.)

(At least he didn’t blame the poor weather conditions as the reason homes sales declined in February!)

Sadly, potential home buyers have more troubles coming their way, as interest rates are expected to rise. Between February of 2013 and February of 2014, the 30-year fixed mortgage rate, tracked by Freddie Mac, has increased by 22%, from … Read More

Is the Housing Market Really a Hot Spot for Investors?

By for Profit Confidential

Urban Housing Market Booming with PotentialNew York City is a colossal urban jungle, but what strikes me is the surging housing market rental prices in not only Manhattan, but also the strong price appreciation in the borough of Brooklyn.

Average home prices peaked around $550,000 in early 2006, prior to a steady decline since then. Yet if you look at regions, especially Manhattan and Brooklyn, the demand for housing and rentals is strong, and this has created a surge in rental prices.

What has been apparent in New York City over the past decade has been the clean-up of the city, along with the rapid development in the surrounding areas close to Manhattan, such as Brooklyn. A look at Brooklyn shows an area that is rapidly growing with multiple new businesses, hotels, and housing market projects reclaimed from former industrial lands.

Whole Foods Market, Inc. (NASDAQ/WFM), for instance, built its largest outlet in Brooklyn that was previously on industrial land. There are now plans for further development in the area. The end result has been a boom in the housing market in Brooklyn for both property buyers and renters. A look at the rental prices in Brooklyn show rental rates as high as $5,000 a month or more for a two-bedroom apartment. The former docklands in Brooklyn have been transformed into a beautiful urban area with paths, expensive condos, and a great view of New York City.

The rise is staggering and clearly indicates a booming housing market there.

The situation in Brooklyn and New York City is indicative of many areas across the country.

Just take a look at the S&P Case-Shiller Home Price … Read More

Why the U.S. Housing Market Recovery Will Falter This Year

By for Profit Confidential

Housing Market Recovery in JeopardyThe chart below is of the S&P Case-Shiller Home Price Index, an index that tracks home prices in the U.S. housing market. As the chart shows, from their peak in 2007 to their low in late 2011, U.S. homes prices fell by about 30%. Since then, prices in the housing market have improved, but they are still down about 20% compared to 2007. Basically, home prices have recouped only one-third of their losses from the 2007 real estate crash.

Yes, the U.S. housing market has regained some lost ground, but it’s far from being back to where it was in 2007. And I’m very worried about the pace of the housing market recovery; I feel that the recovery is in jeopardy.

HPI SP Case-Shiller Home Price Index Chart

Chart courtesy of www.StockCharts.com

Consider this: the interest rate on the 30-year fixed mortgage tracked by Freddie Mac increased to 4.43% in January of this year from 3.41% in January of 2013. (Source: Freddie Mac web site, last accessed February 26, 2014.) While there hasn’t been much mainstream media coverage on this, mortgage rates have increased by 30% in one year’s time. With the Federal Reserve cutting back on its quantitative easing program, interest rates are expected to continue their path upwards in 2014.

Higher interest rates are pushing would-be homebuyers away from the housing market. The U.S. Mortgage Bankers Association reported last week that its index, which tracks mortgage activity (of both refinanced and new home purchases), fell 8.5% in the week ended February 21. (Source: Reuters, February 26, 2014.)

And new homebuilders are seeing demand from homebuyers decline in the housing market as well. While presenting … Read More

Bond Market: Something Wicked Cometh This Way

By for Profit Confidential

Bond Investors to Face Severe Losses in 2014The bond market is in trouble.

As we all know, the Federal Reserve has been the biggest driver of bonds since the financial crisis. The central bank lowered its benchmark interest rate to near zero, then started quantitative easing, all of which resulted in the bond market soaring as yields collapsed to multi-decade lows.

The chart below will show you what’s happened to the U.S. bond market since the mid-1970s.

As you can see from the chart, the declining yields on bonds stopped in the spring of 2013 and have increased sharply since then.

30-Year T-Bond Yield Chart

Chart courtesy of www.StockCharts.com

What’s next for bonds?

The Federal Reserve is slowly taking away the “steroids” that boosted the bond market. The central bank is now printing $65.0 billion of new money a month instead of the $85.0 billion it was printing just a few months back. And now we hear the Federal Reserve will be slowing its purchases by $10.0 billion a month throughout 2014.

Since May of last year alone, when speculation started that the Federal Reserve would cut back on its money printing program, bond yields skyrocketed and bond investors panicked.

According to the Investment Company Institute, investors sold $176 billion worth of long-term bond mutual funds between June and December of last year. (Source: Investment Company Institute web site, last accessed February 26, 2014.) I would not be surprised if withdrawals from bond mutual funds are even bigger this year.

And China is slowly exiting the U.S. bond market, too. According to the U.S. Department of the Treasury, in December, China sold the biggest amount of U.S. bonds since 2011. In … Read More

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