The April U.S. existing home sales data is causing analysts and traders across the entire spectrum of capital market products to re-evaluate their expectations for U.S. economic activity for the foreseeable future. Although home sales have increased on a year-over-year basis, the timing of the April reduction is of paramount importance as an economic indicator.
With mortgage rates are at record low levels and continuous stories of a housing rebound this year, many analysts had been predicting a sustained increase in home sales. The seasonally busy spring housing market is always the most critical for the industry as it sets the industry's tone for the rest of the year. But this unexpected April stumble in sales has also caused renewed questions about the rest of the consumption and production cycles that follow home sales.
The general rule is that as goes housing, so goes the rest of the economy. The first part of the rest of the broader economy is consumer expenditures for autos, furniture, travel, clothing, etc. Increasing home sales is an indication of increased consumer confidence, which is then followed by increased consumption. And the reverse is also true.
But consumption may also be broadly divided into two distinct categories: rich people and everyone else. The top 10% of income earners account for 50% of consumer expenditures. So the first two things economists want to see coming into spring every year is an increase in housing activity and an increase in consumption at high-end retailers. If they are both up, increased sales will be expected at mid-tier retailers. If, however, the opposite occurs, that indicates that economic activity and consumption will not be strong.
The April existing home sales figures follows last week's disappointing first-quarter revenue and earnings at Tiffany's (TIF) and together, they are causing economists, analysts, traders, and investors to shift from optimism to caution on economic activity and sales by homebuilders and retailers.
Homebuilder stocks are off by about 5% today and across the spectrum of companies focused on first-time buyers on up to high-end buyers, most notably KB Home (KBH) and Toll Brothers (TOL), respectively.
High- and mid-tier retailers were also off today with the greatest declines coming from Sears (SHLD), off by 8%, J.C. Penney (JCP), off by about 4%. The high end is off a bit less but still down with the most notable being Coach (COH), down by 2.5%, Williams-Sonoma (WSM), down by about 2.5%, and Ethan Allen Interiors (ETH), down by about 3%.
In addition, the European debt/banking crises is contributing to a general shift globally from risk to safety and being reflected in falling equities and sovereign bond yields -- especially into what are perceived to be countries in relatively stronger financial positions. The shift into strong sovereign bonds has result today in new record low yields for the 10-year Treasuries in the U.S., the U.K., and Germany of 1.65%, 1.63%, and 1.26%, respectively.
There are two fundamentally important aspects of this to keep in mind. First, an even and globally diverse flight into relatively stronger sovereigns by international capital is an indication that the shift is orderly and not a panic -- even as it is large. A panic would be evidenced by a flight of capital from Germany and the UK into the US as well. Although that has not happened it is prudent to be vigilant for such activity forming.
Second, a flight into U.S. Treasuries is a part of the normal corrective process for both the U.S. and global economies. Lower long-end treasury yields in the U.S. causes mortgage rates to decline, which helps counteract the crisis by making home financing – and, thus, home purchase interest -- more attractive.
Mortgage rates are already at record low levels and will decline even further, commensurately with lower Treasury yields. Each 10-basis-point reduction in mortgage rates lowers monthly P&I payments by $20 per $100,000 of mortgage principal. It also begins to expand the number of potential home buyers who may qualify for a mortgage.
The bottom line is that the global capital market structure is in many ways self-correcting and it is prudent to keep that in mind as others begin to panic.