Pisani: What No One's Saying About Mortgages
While July existing home sales came in in line with expectations, the pace is still weak and the increase in inventory (to 9.6 months supply at the current sales pace) is especially unwelcome. This occurred before the recent credit crunch, so the concern is that difficulties in the mortgage market may further impact sales in August.
However, the following points should be kept in mind:
1) Rates for a 30-year fixed rate mortgage have been dropping, not rising, recently, to 6.5%, about where it was a year ago. Non-conforming loans (those over $417,000) are quoted higher, about 7.25%, just a bit higher than they were a year ago.
2) The Fed seems poised to cut rates, which should help reduce rates further.
3) Like oil, the impact of housing is not as great as it once was. Michael Darda at MKM Partners noted that: "residential real estate only represents 4.9% of the economy directly, down from a cycle peak of 6.3% in 2005. As such, even with an extended L-shaped recovery in housing, the impact of the drag from weak construction spending should continue to wane going forward."
4) House prices, while still decelerating, are not decelerating as much as they were earlier in the year, according to economist Robert Brusca.
There will be plenty of housing chatter this week. The Fed chairman will be speaking on "housing and monetary policy" on Friday, August 31 (at the Fed's annual Jackson Hole conference). S&P/Case Shiller home price indexes for June and Q2 will be released on Tuesday.
Taking Time to Readjust Risk (posted earlier today)
The 2.3 percent rise in the Dow last week, coupled with lower volume and lower volatility, has given the markets what they want most: time. Time allows market participants to readjust risk.
JP Morgan, in a note to clients this morning, said, "The key issue for the months ahead will be to figure out the impact of tighter credit conditions on economic growth."
Take housing. How much tougher will it be to get a mortgage? Mortgage bulls note that rates for a 30-year fixed rate mortgage have been dropping, not rising, recently, to 6.5 percent. That's the good news.
The bad news is that the existing home sales figure today, while in line with expectations at 5.75 million, is still at a weak pace. At current sales rates, it would take 9.6 months to sell off all the homes, a new high for this cycle. Credit Suisse noted today that existing home sales may drop up to 15 percent more into 2008.
Other industries look much stronger. Tech continues to be a bright spot. U.S. demand seems to be improving, and manufacturing output has been increasing in Asia.
As for interest rates, central banks are moving in somewhat different directions. The Bank of Japan has already declined to raise rates last week; they were left unchanged at 0.5%. The European Central Bank may raise rates at its Sept. 6 meeting. China raised rates last week for the fourth time this year.
The markets believe the Fed will cut rates at its Sept. 18 meeting, and will cite a downwward adjustment in its growth forecast as a reason to do so.
Thoughts on the Home Depot Supply sale: Credit Suisse echoed the rest of the Street this morning in a note to clients: "it now leaves HD with the slower growing division, a division losing share to LOW, and one that will require significant investment to reverse the margin deterioration that it is suffering from this year ... we expect that spending on home improvement will decline in 2008, making it another tough year for HD."
I noted on our air on Friday that the important thing about the Home Depot deal is that it gets done, even if it is at a lower price. HD Supply is being sold for $8.5 billion, 18 percent less than a previously agreed-upon price, to Bain Capital, Carlyle Group, and Clayton, Dublier & Rice. Home Depot will hold 12.5 percent of the unit's equity, and guarantee $1 billion of its debt.
"Big" Deals (posted earlier today)
I noted on Friday that the important thing about the Home Depot deal is that it get done, even if it is at a lower price. This of course is leading to speculation that other deals will also get done, but be similarly re-negotiated at a lower price.
Last week's 2.3 percent advance in the Dow (best since April) was due in good part to short covering; the Commodity Futures Trading Commission reported at the close on Friday that large speculators collectively held a record net short position in S&P E-Mini contracts.
The big meeting of the Altria board on Wednesday seems to have everyone believing they will announce a spinoff of the tobacco operations, Philip Morris International.
Gateway being bought by Acer for $710 million ($1.90 a share), nearly a 60% premium to Friday's close. At its height in 1999, it was $84. U.S. Steel buying Canada's Stelco for about $1.1 billion. FT is reporting that Wal-Mart is considering acquisitions in the U.S.
Rio Tinto Rio gets U.S. anti-trust approval to acquire Alcan , and close to selling Alcan’s packaging arm to Sealed Air for more than $5 billion, the London Telegraph reports.
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