Existing Home Sales Extend Plunge, Biggest Annual Drop Since 2014

After new- and existing-home sales tumbled in December, expectations were for a modest 0.5% rebound in January (despite plunging mortgage applications and soaring rates). But that did not happen as existing home sales tumbled 3.2% MoM to its lowest level since Aug 2016.

https://www.zerohedge.com/sites/default/files/inline-images/2018-02-21_7-02-30.jpg?itok=nohBLCql

NOTE – this data is based on signed contracts from Nov/DEC, which means the recent spike in rates is not even hitting this yet)

Existing home sales are down 4.8% YoY – the biggest drop since August 2014.

https://www.zerohedge.com/sites/default/files/inline-images/2018-02-21_7-12-57.jpg?itok=qlkJcTOR

The West (-5.0%) and Midwest (-6.0%) saw the biggest drop in sales and while the blame (see below) was put on inventories, data shows a 4.1% increase in “available for sale” homes?

Of course NAR is careful to blame inventories – and not soaring rates affecting affordability: Lawrence Yun, NAR chief economist, says January’s retreat in closings highlights the housing market’s glaring inventory shortage to start 2018.

“The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month,” he said.

“While the good news is that Realtors® in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace.

“It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”

The median existing-home price in January was $240,500, up 5.8% from January 2017.

First-time buyers were 29 percent of sales in January, which is down from 32 percent in December 2017 and 33 percent a year ago.

“The gradual uptick in wages over the last few months is a promising development for the housing market, but there’s risk these income gains could be offset by the recent jump in mortgage rates,” said Yun.

“That is why the pace of added new and existing supply in the months ahead is worth monitoring. If inventory conditions can improve enough to cool the swift price growth in several markets, most prospective buyers should be able to absorb the higher borrowing costs.

So, will higher rates break housing market momentum?

The following chart suggest ‘yes’ – that surge in rates will have a direct impact on home sales (or prices will be forced to adjust lower) as affordability collapses…

https://www.zerohedge.com/sites/default/files/inline-images/2018-02-08_8-20-26.jpg

Source: ZeroHedge

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Housing Starts, Permits Surge On Spike In Rental Units

Another day, another confirmation that the US economy is heating up just a little more than most expected.

https://s.hdnux.com/photos/46/01/60/9968677/5/920x920.jpg

With Wall Street expecting housing starts and permits of 1.234MM and 1.300MM, respectively, moments ago the US Census reported number that blew away expectations, with starts printing at 1.326MM in January, a 9.7% increase relative to the 3.5% expected, while permits jumped by 7.4% from 1.300MM to 1.396MM, on expectations of an unchanged print.

What is notable in today’s number is that single-family units were largely in line, declining for Permits from 881K to 866K, while single-family Starts rose from 846K to 877K, still well below November’s 946K.

So where did the bounce come from? The answer: multi-family, or rental units, which surged for Permits from 382K to 479K, while multi-family Starts surged from 360K to 431K, the highest number since December 2016.

Here is the visual breakdown, first Starts:

https://www.zerohedge.com/sites/default/files/inline-images/housing%20starts%20jan%202018.jpg?itok=lb-HjIWq

then Permits:

https://www.zerohedge.com/sites/default/files/inline-images/housing%20permits%20jan%202018.jpg?itok=IO5Vk_Jp

While it is very early to infer causality, the jump in rental unit construction could potentially add a modest disinflationary pressure to rents, which in recent months have seen declines across some of America’s largest MSAs. Whether or not this impacts Fed policy is too early to determine.

Source: ZeroHedge

The Fed Has Run Out Of Road, In Three Charts

Critics of “New Age” monetary policy have been predicting that central banks would eventually run out of ways to trick people into borrowing money.

https://www.zerohedge.com/sites/default/files/inline-images/2018-02-08_11-11-32_0.jpg?itok=yF1qUUE9

There are at least three reasons to wonder if that time has finally come:

Wage inflation is accelerating

Normally, towards the end of a cycle companies have trouble finding enough workers to keep up with their rising sales. So they start paying new hires more generously. This ignites “wage inflation,” which is one of the signals central banks use to decide when to start raising interest rates. The following chart shows a big jump in wages in the second half of 2017. And that’s before all those $1,000 bonuses that companies have lately been handing out in response to lower corporate taxes. So it’s a safe bet that wage inflation will accelerate during the first half of 2018.

https://i0.wp.com/dollarcollapse.com/wp-content/uploads/2018/02/Wage-inflation-Feb-18.jpg?ssl=1

The conclusion: It’s time for higher interest rates.

The financial markets are flaking out

The past week was one for the record books, as bonds (both junk and sovereign) and stocks tanked pretty much everywhere while exotic volatility-based funds imploded. It was bad in the US but worse in Asia, where major Chinese markets fell by nearly 10% — an absolutely epic decline for a single week.

https://i1.wp.com/dollarcollapse.com/wp-content/uploads/2018/02/NASDAQ-Feb-18.jpg?ssl=1

Normally (i.e., since the 1990s) this kind of sharp market break would lead the world’s central banks to cut interest rates and buy financial assets with newly-created currency. Why? Because after engineering the greatest debt binge in human history, the monetary authorities suspect that even a garden-variety 20% drop in equity prices might destabilize the whole system, and so can’t allow that to happen.

The conclusion: Central banks have to cut rates and ramp up asset purchases, and quickly, before things spin out of control.

So – as their critics predicted – central banks are in a box of their own making. If they don’t raise rates inflation will start to run wild, but if they don’t cut rates the financial markets might collapse, threatening the world as we know it.

There’s not enough ammo in any event

Another reason why central banks raise rates is to gain the ability to turn around and cut rates to counter the next downturn.

But in this cycle central banks were so traumatized by the near-death experience of the Great Recession that they hesitated to raise rates even as the recovery stretched into its eighth year and inflation started to revive. The Fed, in fact, is among the small handful of central banks that have raised rates at all. And as the next chart illustrates, it’s only done a little. Note that in the previous two cycles, the Fed Funds rate rose to more than 5%, giving the Fed the ability to cut rates aggressively to stimulate new borrowing. But – if the recent stock and bond market turmoil signals an end to this cycle – today’s Fed can only cut a couple of percentage points before hitting zero, which won’t make much of a dent in the angst that normally dominates the markets’ psyche in downturns.

Most other central banks, meanwhile, are still at or below zero. In a global downturn they’ll have to go sharply negative.

https://i1.wp.com/dollarcollapse.com/wp-content/uploads/2018/02/Fed-funds-rate-Fed-18.jpg?ssl=1

So here’s a scenario for the next few years: Central banks focus on the “real” economy of wages and raw material prices and (soaring) government deficits for a little while longer and either maintain current rates or raise them slightly. This reassures no one, bond yields continue to rise, stock markets grow increasingly volatile, and something – another week like the last one, for instance – happens to force central banks to choose a side.

They of course choose to let inflation run in order to prevent a stock market crash. They cut rates into negative territory around the world and restart or ramp up QE programs.

And it occurs to everyone all at once that negative-yielding paper is a terrible deal compared to real assets that generate positive cash flow (like resource stocks and a handful of other favored sectors like defense) – or sound forms of money like gold and silver that can’t be inflated away.

The private sector sells its bonds to the only entities willing to buy them – central banks – forcing the latter to create a tsunami of new currency, which sends fiat currencies on a one-way ride towards their intrinsic value. Gold and silver (and maybe bitcoin) soar as everyone falls in sudden love with safe havens.

And the experiment ends, as it always had to, in chaos.

https://www.zerohedge.com/sites/default/files/inline-images/2018-02-11_8-32-30.jpg?itok=dLAzsuZw

Source: ZeroHedge

“Stocks No Longer Make Sense To Me” – Here’s Why Quants Are Embracing Bitcoin

Since bitcoin first seeped into the public consciousness in 2013, the stereotypical image of the cryptocurrency trader is the 25-year-old tech bro who uses phrases like “YOLO” and “FOMO” when describing his trading strategy and general investing philosophy.

In more recent years, the image of the mom-and-pop crypto trader has taken hold, as Mrs. Watanabe – the archetypal Japanese and South Korean house wife once known for trading foreign exchange – has migrated to trading bitcoin and ethereum.

But as the Financial Times pointed out in a story about financial professionals dabbling in crypto markets, the hoodie-wearing twenty something described above isn’t entirely representative of the crypto community. In fact, many former Wall Street professionals – some with backgrounds working at hedge funds or quantitative trading shops – have embraced cryptocurrency trading.

And while the allure of obscene returns is obviously one reason for the attraction, one venture capitalist interviewed by the FT offered an even more revealing answer:

He embraced crypto after becoming disillusioned with traditional markets, which “no longer make sense” thanks to nearly a decade of central bank intervention.

“I’ve been out of the stock market because it stopped making sense to me,” he says. Central bank support for the markets plus the trend of passive investing have turned it into a game with unclear rules.

“Over the past few years or so, everyone has just been buying indexes and they haven’t been doing price discovery. They’re just investing in a trend of something going up and up and up,” he says.

Until very recently, volatility in global stock markets had fallen to one of the lowest levels in history – making life difficult for quantitative traders who leverage up and play for small moves.

But in the crypto market, circumstances couldn’t be more different. Such high volatility is essentially a quantitative traders’ dream.

“In a days worth of cryptocurrency movement you have a week or a month of equity market movement or a decade of country debt,” he said.

Another apt description came from a hedge fund trader who said financial professionals are drawn to bitcoin for the same reasons they’re drawn to the poker table.

“It’s fun,” one hedge fund trader said, adding that she did not want “fomo,” the acronym for ‘fear of missing out’. One London-based banker was more blunt: it was gambling for people who could afford to lose a bit of money. “That’s it. Nothing else.”

We’re not sure the surprising number of people who bought bitcoin on their credit cards last year would agree.

Source: ZeroHedge

The State Of American Debt Slaves

It was one gigantic party. But wait…

Total consumer credit rose 5.4% in the fourth quarter, year over year, to a record $3.84 trillion not seasonally adjusted, according to the Federal Reserve. This includes credit-card debt, auto loans, and student loans, but not mortgage-related debt. December had been somewhat of a disappointment for those that want consumers to drown in debt, but the prior months, starting in Q4 2016, had seen blistering surges of consumer debt.

Think what you will of the election – consumers celebrated it or bemoaned it the American way: by piling on debt.

The chart below shows the progression of consumer debt since 2006 (not seasonally adjusted). Note the slight dip after the Financial Crisis, as consumers deleveraged – with much of the deleveraging being accomplished by defaulting on those debts. But it didn’t last long. And consumer debt has surged since. It’s now 45% higher than it had been in Q4 2008. Food for thought: Over the period, the consumer price index increased 17.5%:

https://wolfstreet.com/wp-content/uploads/2018/02/US-consumer-credit-total-2017-Q4.png

Credit card debt and other revolving credit in Q4 rose 6% year-over-year to $1.027 trillion, a blistering pace, but it was down from the 9.2% surge in Q3, the nearly 10% surge in Q2, and the dizzying 12% surge in Q1. So the growth of credit card debt in Q4 was somewhat of a disappointment for those wanting to see consumers drown in expensive debt.

The chart below shows the leap of the past four quarters over prior years. This pushed credit card debt in Q3 and Q4 finally over the prior record set in Q4 2008 ($1.004 trillion), before it came tumbling down via said “deleveraging.”

https://wolfstreet.com/wp-content/uploads/2018/02/US-consumer-credit-cards-2017-Q4.png

These are not seasonally adjusted numbers, and you can see the seasonal surges in credit card debt every Q4 during shopping season (as marked), and the drop afterwards in Q1. But then came 2017. In Q1 2017, credit card debt skyrocketed to an even higher level than Q4, when it should have normally plunged – a phenomenon I have not seen before.

This shows what kind of credit-card party 2017 and Q4 2016 was. Over the four quarter period, Americans added $58 billion to their credit card debt. Over the five-quarter period, they added $109 billion, or 12%! Celebration or retail therapy.

Auto loans rose 3.8% in Q4 year-over-year to $1.114 trillion. It was one of the puniest increases since the auto crisis had ended in 2011. Since then, the year-over-year increases were mostly in the 6% to 9% range. These are loans and leases for new and used vehicles. So the weakness in new-vehicle sales volume in 2017 was covered up by price increases in both new and used vehicles in the second half and strong used-vehicle sales:

https://wolfstreet.com/wp-content/uploads/2018/02/US-consumer-credit-auto-2017-Q4.png

The red line in the chart above indicates the old unadjusted data. In September 2017, the Federal Reserve announced a big adjustment of consumer credit data going back through Q4 2015, impacting auto loans, credit card debt, and total consumer credit. This adjustment was based on survey data collected every five years. So routine. But for Q4 2015, the adjustment knocked auto loan balances down by $38 billion.

Hence that misleading dip in auto loans in Q4 2015 in the chart above. This was at the peak of the auto-buying frenzy, and actual auto-loan balances certainly rose.

Student loans surged 5.6% in Q4 year-over-year. This seems like a shocking increase, but the year-over-year increases in Q3 and Q4 were the only such increases below 6% in this data series. Between 2007 – as far back as year-over-year comparisons are possible in this data series – and Q3 2012, the year-over-year increases ranged from 11% to 15%:

https://wolfstreet.com/wp-content/uploads/2018/02/US-consumer-credit-student-loans.png

And there was no dip in student-loan balances during the Financial Crisis; in fact, those were the years with the steepest growth rates. From Q1 2008 to Q4 2017, student loan balances soared 141%, from $619.3 billion to $1.49 trillion, multiplying by 2.4 times over those ten years. More food for thought: Over the same period, the consumer price index rose 17.5%.

The problem with debt is that it doesn’t just go away on its own. If one side cannot pay, the other side takes a loss on their asset. Some auto loans and credit card debts remain on the balance sheet of lenders, while others have been securitized and are spread around among investors. But most student loans are guaranteed by the taxpayer or directly funded by the government.

Over the years, student loans have fattened entire industries: Investors in private colleges, the student housing industry (an asset class within commercial real estate), Apple and other companies supplying students with whatever it takes, the textbook industry…. They’re all feeding at the big trough held up by young people and guaranteed by the taxpayer. Food for thought, so to speak.

Source: By Wolf Richter | Wolf Street

 

Fire Sale Begins: Chinese Conglomerate HNA Starts Liquidating Billions In US Real Estate


Yesterday ZeroHedge
explained that one of the reasons why Deutsche Bank stock had tumbled to the lowest level since 2016, is because its top shareholder, China’s largest and most distressed conglomerate, HNA Group, had reportedly defaulted on a wealth management product sold on Phoenix Finance according to the local press reports. While HNA’s critical liquidity troubles have been duly noted here and have been widely known, the fact that the company was on the verge (or beyond) of default, and would be forced to liquidate its assets imminently, is what sparked the selling cascade in Deutsche Bank shares, as investors scrambled to frontrun the selling of the German lender which is one of HNA’s biggest investments.

Now, one day later, we find that while Deutsche Bank may be spared for now – if not for long – billions in US real estate will not be, and in a scene right out of the Wall Street movie Margin Call, HNA has decided to be if not smartest, nor cheat, it will be the first, and has begun its firesale of US properties.

According to Bloomberg, HNA is marketing commercial properties in New York, Chicago, San Francisco and Minneapolis valued at a total of $4 billion as the indebted Chinese conglomerate seeks to stave off a liquidity crunch. The marketing document lists six office properties that are 94.1% leased, and one New York hotel, the 165-room Cassa, with a total value of $4 billion.

One of the flagship properties on the block is the landmark office building at 245 Park Ave., according to a marketing document seen by Bloomberg.

https://www.zerohedge.com/sites/default/files/inline-images/245%20park.jpg?itok=o04ldvfo245 Park Avenue, New York

HNA bought that skyscraper less than a year ago for $2.21 billion, one of the highest prices ever paid for a New York office building. The company also is looking to sell 850 Third Ave. in Manhattan and 123 Mission St. in San Francisco, according to the document. The properties are being marketed by an affiliate of brokerage HFF.

This is just the beginning as HNA’s massive debt load – which if recent Chinese reports are accurate the company has started defaulting on – is driving the company to sell assets worldwide.

According to Real Capital Analytics estimates, HNA owns more than $14 billion in real estate properties globally. The problem is that the company has a lot more more debt. As of the end of June, HNA had 185.2 billion yuan ($29.3 billion) of short-term debt — more than its cash and earnings can cover. The company’s total debt is nearly 600 billion yuan or just under US$100 billion. Which means that the HNA fire sale is just beginning, and once the company sells the liquid real estate, it will move on to everything else, including its stake in all these companies, whose shares it has already pledged as collateral.

https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/12/23/HNA%20reverse%20rollup.png

So keep a close eye on Deutsche Bank stock: while HNA may have promised John Cryan it won’t sell any time soon but companies tend to quickly change their mind when bankruptcy court beckons.

Finally, the far bigger question is whether the launch of HNA’s firesale will present a tipping point in the US commercial (or residential) real estate market. After all, when what until recently was one of the biggest marginal buyers becomes a seller, it’s usually time to get out and wait for the bottom.

Source: ZeroHedge

 

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