Despite a less than expected inflation report, inflation is still worse than the 1970s. Plus a look at the housing market.
A Difficult Situation
August 10 (King World News) – Steph Pomboy: Markets celebrating softer CPI as meaning less Fed rate hikes. but they are missing a critical part of the story. What does it mean for margins? We will find out with PPI tomorrow. Right now input costs (PPI) outpacing ability to pass along (CPI) by widest ever – worse even than 1970s.
HOUSING MARKET LEADING U.S. TO RECESSION, NAHB CHIEF SAYS
Gerald Celente: The weakening U.S. housing market is leading the country into a recession, Jerry Howard, CEO of the National Association of Home Builders (NAHB), said in a recent Bloomberg interview.
Residential real estate makes up 15 to 18 percent of the U.S. GDP in a typical year, according to the NAHB, so a decline in home construction weakens the broader economy.
A slumping home construction market has led every recession since World War Two, Howard pointed out.
In June, purchases of new homes dropped by 8.1. percent, year over year, to an annual rate of 590,000, the lowest in two years, the NAHB reported. Purchases of existing homes were down 5.4 percent for the month.
The market is squeezed from two directions.
First, mortgage interest rates have doubled in the past year. The average U.S. rate for a 30-year, fixed-rate mortgage was 5.57 percent on 29 July; a year ago, the rate was below 2.5 percent. On Monday, the average was 5.28 percent, Bankrate.com reported.
Second, builders’ cost for materials and labor has risen relentlessly, making new homes less and less affordable for modest and middle-income buyers and also driving up the cost of existing homes as competition for them sharpens.
Just 13 percent of new homes sold in June were priced below $300,000, while a year ago the number was 26 percent, the U.S. census bureau reported.
The proportion of U.S. consumers planning to buy a home in the next six months fell to 4.4 percent in July, the lowest in seven years, according to the Conference Board.
As a result, builders’ confidence in their industry’s future prospects has fallen for seven consecutive months in the NAHB’s monthly survey. In July, builders’ outlook dropped 12 points to a ranking of 55, the second-largest monthly plunge in the survey’s history, and the lowest point since May 2020 as the COVID War began.
Housing may have led the country into every recession in recent history, but it also has led the country out, Howard noted.
However, this time the recovery might take longer than usual, he warned.
Federal trade negotiators should pursue agreements with Canada to allow more Canadian lumber into the U.S. to push down materials costs, Howard urged.
Better skills training in the building trades and prioritizing immigration permits for skilled trade workers also would help ease the crisis, he said, as would easing overly stringent zoning regulations and building codes.
“The softening of single-family construction should send a strong signal to the Federal Reserve that tighter financial conditions are producing a housing downturn,” Robert Dietz, the NAHB’s chief economist, told Business Insider.
Rising interest rates and the high costs of labor, material, and land on which to build new homes will prevent the home construction industry’s economic recovery this year.
Much of the industry’s purchases will be made by private equity firms, which have swooped into the housing market in the last two years, buying not only individual houses but also contracting to buy entire tracts of new housing that they can rent at premium prices.
NEW HOME SALES FALL TO TWO-YEAR LOW IN JUNE
New contracts signed in June for home purchases were 20 percent fewer than a year earlier, to their lowest since September 2011, excepting March and April 2020 as the COVID War began, the National Association of Realtors (NAR) reported.
The number of homes under contract declined by 8.6 percent in June, compared to analysts’ predictions of a 1-percent dip.
Closed sales of new U.S. homes also fell in June, marking the fifth monthly decline this year and the lowest rate in two years, Bloomberg reported.
Purchases of new single-family homes dropped by 8.1 percent to 590,000. Economists surveyed by Bloomberg had predicted 655,000.
Sales of new homes are now 13.4 percent lower this year than during the first six months of 2021, according to the National Association of Home Builders (NAHB).
The average interest rate on a 30-year, fixed-rate mortgage was under 3 percent at the end of last year; in some markets, it has topped 6 percent this year. The U.S. average rate stood at 5.28 percent on 1 August.
Rising interest rates have combined with record-high home prices to shut lower- and middle-class buyers out of the market.
The reason: only the well-off can afford high monthly mortgage payments that include suddenly higher interest rates.
The average selling price of a U.S. home was $525,000 in this year’s second quarter, according to the Federal Reserve Bank of St. Louis.
However, data from the census bureau and the U.S. Department of Housing and Urban Development pegged June’s average selling price at $456,800.
Either of those figures place the average-priced home for sale beyond the means of the typical household with two working adults, which now has a median income of $70,768, according to the census bureau.
The proportion of U.S. consumers planning to buy a home in the next six months fell to 4.4 percent in July, the lowest in seven years, according to the Conference Board.
“Buyers are balking due to deteriorating affordability conditions and growing sticker shock,” Danushka Nanayakkara-Skillington, the NAHB’s assistant vice-president for forecasting, told Business Insider.
Nationally in June, buyers canceled 14.5 percent of home sales under contract, the highest number since April 2020 when the COVID War began, John Burns Real Estate Consulting said.
PulteGroup, a major U.S. home builder, saw new orders fall 23 percent in the second quarter, year on year. The cancellation rate more than doubled during the period, from 7 percent to 15.
“The uptick we have seen in cancellations has really been in the last 30 to 60 days, and the leading driver has been buyers’ remorse,” CEO Ryan Marshall said in a late July earnings call.
“A big part of that comes from buyers that made a buying decision during the run- up in interest rates, and as talk of recession increased, their remorse and fears have also increased with it,” he said.
D.R. Horton, which builds more U.S. houses than any other company, reported that buyers pulled out of 24 percent of their contracts in the second quarter, up almost a third from the same time the year before.
The cancellation rate is a signal “that more Americans are now struggling to afford home purchases,” BI noted.
At the end of June, 457,000 new homes were up for sale nationally, the most since 2008. At the current sales pace, the market would need 9.3 months to find buyers for them, compared with 8.4 months in May.
Closed sales dropped by 36.7 percent in the western U.S., 2 percent in the South, and 5.3 percent in the Northeast. The Midwest was the only part of the U.S. where sales increased.
The number of U.S. homes sold this year will drop 13 percent below 2021’s total but begin to rise again early next year, according to the NAR.
Like the auto industry, home construction underpins a large swath of the U.S. economy. The impact of falling sales and slowing construction will ripple throughout a range of markets and industries, further tipping the economy toward recession.
“ZOOMTOWNS” NO LONGER ZOOMING
“Zoomtowns”—second-tier cities that boomed when workers could relocate away from urban centers and “commute” to their offices via Zoom—are seeing their luster fade.
Boise, Idaho’s capital city, was one of the most popular: it offered cheap housing, spectacular scenery, few COVID-related mandates, and it was reasonably close to Seattle and California. Home prices soared as migrants flooded in.
Now the Zoom boom is over.
With mortgage rates their highest in 13 years, home buyers are no longer willing to pay last year’s record prices.
In June, 61 percent of homes listed for sale in the Boise metro area took a price cut, according to online brokerage Redfin, the highest rate of price-chopping among the 97 metro areas Redfin monitors.
Other top-tier Zoomtowns seeing housing prices slide include Denver, Salt Lake City, and Tacoma, Redfin noted.
Mortgage rates topped 5 percent in April and “it was like somebody just turned the lights off,” Shauna Pendleton, a Redfin agent in Boise, told The Wall Street Journal. “Buyers just disappeared off the face of the Earth.”
Boise’s slump is not unique.
U.S. home purchases have declined for five consecutive months through June. Mortgage rates have virtually doubled since December, inflation is crimping household budgets, and homes for sale are still relatively scarce, especially in the low- to mid-price ranges.
In June, the number of active listings of houses for sale in Austin, Tex., perhaps the hottest of all Zoomtowns, rose 218 percent year on year. In Phoenix, the number was 156 percent higher.
In Ada County, which includes Boise, there were 179 percent more houses on the market than a year earlier.
Those houses will remain on the market longer than they would have last year.
“Too many buyers cannot afford housing in this market,” Nancy Vanden Houten, Oxford Economics’ chief economist, said to the WSJ.
HOME PRICES RIDING FOR A FALL, FORMER IMF OFFICIAL PREDICTS
A combination of factors points to home prices falling in the second half of this year, according to Desmond Lachman, a senior fellow at the American Enterprise Institute and former deputy director of the International Monetary Fund.
First, rampant inflation, which reached 9.1 percent in June, will force the U.S. Federal Reserve to keep raising interest rates at its next few meetings, he told Business Insider.
That will translate to higher mortgage interest rates, which will slim down the number of households that can qualify for a mortgage, especially as lenders tighten their lending criteria further ahead of a possible recession.
Second, the Fed is no longer buying mortgage bonds. It was buying $40 billion a month during the COVID War, ensuring cheap money for average borrowers. Now lenders are more choosy, pushing mortgage rates higher.
Third, the higher interest rates have chopped demand for new houses, as we report in “New Home Sales Fall to Two-Year Low in June” in this issue.
That will be the biggest single factor forcing prices lower, Lachman said.
Fourth, the Fed’s aggressive moves on interest rates are raising the odds that the U.S. will enter a full-blown recession after entering a technical one last month.
A technical recession is defined as two quarters of shrinking economic activity. Economists wait to acknowledge a recession until the nonprofit National Bureau of Economic Research declares one.
During recessions, people lose jobs and delay major purchases such as houses, Lachman noted.
Fifth, the plunging stock market—down almost 20 percent this year—has wiped out a significant amount of wealth, making people skittish about the future, he said, and predicted that share prices have further to fall.
Home prices will remain high because sellers will be reluctant to let go of current asking prices, he said, but will be forced to later on as houses sit on the market for longer and longer.
Prices will shed 15 to 20 percent next year before beginning to recover toward the end of 2023, he said, coinciding with the Fed beginning to reduce interest rates.
José Torres, senior economist at Interactive Brokers, expects to see home prices fall as much as they did during the Great Recession, he said in a late July interview with BI last week.
“A perfect storm is brewing in the real estate market due to near decade high construction levels and plummeting demand,” he said.
“Right now there is a shortage of [housing] supply,” Lachman acknowledged, “but if demand is falling off a cliff, it doesn’t matter that there’s a shortage of supply. If demand falls enough, you’re going to have those inventories going up and the price coming down.”
BANKS TIGHTEN LENDING ON COMMERCIAL REAL ESTATE
Banks are lending less, setting more stringent borrowing criteria, and charging higher interest on purchases of hotels, office buildings, shopping malls, and other commercial properties, The Wall Street Journal reported.
The stricter requirements reflect not only the recent rise in interest rates, but also the wobbly market in commercial properties and what many see as the growing risk of a recession, which would likely increase the number of loans that go bad.
In this year’s second quarter, banks issued $20.6 billion in securities backed by commercial mortgage loans, almost a third less than the $29 billion they lent in the first three months of this year, according to research service Trepp.
In June, banks issued only $3.6 billion in collateralized loan obligations, which are securities backed by short-term loans to developers.
In contrast, in February banks issued $8.9 billion worth.
Collateralized loan obligations are seen as somewhat riskier than other kinds of property loans.
The outlook for commercial real estate turned especially sour last month when inflation topped 9 percent, The Wall Street Journal said.
In the second quarter, investors bought $190.3 billion in commercial properties, 17 percent more than the same period a year earlier, data service MSCI said.
That is a fraction of the 150-percent increase booked in the second quarter of 2021, MSCI noted.
The number of second-quarter deals was 22 percent fewer than a year previous.
After peaking in March, commercial property values have slipped about 5 percent, research service Green Street noted.
Since the beginnings of the COVID War in “Real Estate’s Reality” (7 Jul 2020), we have predicted the unfolding decline of the commercial real estate market and documented its implosion in articles such as “Commercial Real Estate: Boom or Bust?” (25 May 2021), “Return to Office Postponed: Commercial Real Estate Bust?” (14 Sep 2021) and “Real Estate Markets Down as Interest Rates Rise” (28 Jun 2022), among others.
Through our ongoing coverage of the commercial real estate’s demise, regular readers have been able to verify the accuracy of our predictions.
In urban centers, the groundshift to remote work has destroyed large swaths of the retail economy that depended on commuters to buy lunches, business wear, and other staples. Remote work has left both retail and office landlords with fewer tenants and reduced incomes from which to pay mortgages and taxes.
As a result, downtown commercial centers in traditional office hubs such as New York City and San Francisco will not return to their pre-COVID size or vitality. We have detailed this trend in articles such as “Retail Chains Abandon Manhattan” (18 Aug 2020) and “Manhattan’s Commercial Real Estate Crash” (21 Sep 2021).
Local governments feel the loss of tenants and economic activity as a plunge in sales and property taxes, leaving officials to fund the same level of services with less money. In those cases, services have to be reduced to balance municipal budgets.
Ultimately, the result is felt by residents of those areas, as their quality of life deteriorates because services are pared back, making cities less appealing to new retailers and companies seeking office space.
Also of importance…
BIG NEWS: Monster 10.8 Million Ounce Gold Equivalent Maiden Resource at Blue Lake!
K92 Mining, one of the highest grade gold producers in the world, just announced a maiden resource at its Blue Lake Gold-Copper Porphyry – a monstrous 10.8 million ounce gold equivalent / 4.7 billion lbs copper equivalent resource! Blue Lake is near K92’s high-grade producing underground mine and has the potential to get much bigger – it only took 17 kilometers of drilling done to define, nearly every hole hit, the discovery cost was super low at <$1/oz and the highest grade portion is open at depth!!!
John Lewins, K92 CEO & Director: “The maiden resource estimate at Blue Lake is a major accomplishment, defining a large-scale, potentially commerical gold-copper porphyry proximal to our high-grade Kainantu underground mine. Blue Lake was also defined efficiently, leveraging our team’s extensive exploration experience in Papua New Guinea, with nearly all holes intersecting mineralization.
10.8 Million Ounces Of Gold Only The Tip Of The Iceberg
Importantly, we believe Blue Lake is only the tip of the porphyry iceberg at Kainantu and have gained a tremendous amount of knowledge for our porphyry exploration programs going forward. In Papua New Guinea, porphyries tend to cluster and there are five other porphyry targets proximal to Blue Lake, with A1 being of the highest priority. Soil sampling at A1 is expected to commence imminently, with diamond drilling planned afterwards. Between our intrusion related gold/copper exploration at Kora, Judd, Kora South and Judd South and our porphyry exploration, we are very excited about the potential at Kainantu.” K92 Mining, symbol KNT in Canada and KNTNF in the US.
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***To listen to Egon von Greyerz discuss the upheaval the world will experience in the coming months CLICK HERE OR ON THE IMAGE BELOW.
***To listen to Alasdair Macleod discuss the mother of all short squeezes in the gold market CLICK HERE OR ON THE IMAGE BELOW.
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