The new-home sales for March, marking the start of the spring/summer housing season, again came in well below expectations, with the month-to-month annualized rate declining by 11.4% to 481,000 in March from 543,000 in February.
This is the opposite of what the market consensus was expecting and has resulted in a substantial selloff in the homebuilders, which repeats the seasonal pattern for such for the seventh year in a row, as I discussed earlier this week in the column "Housing Repeats Seasonal Pattern."
The homebuilders are off their lows from earlier in the day but still off by between 2.5% and 8% as of about 1:30 p.m. ET. If the seasonal pattern of the past seven years continues, these stocks will continue to decline through the third quarter.
The pattern, in my opinion, will hold true again this year, based on the vast majority of economic activity measures consistently coming in below projections for the past six months or so, and that I've written much about during that time.
The only figures supporting the expectations for rising new-home sales have been the increase in household formations and the decline in the unemployment rate.
A few weeks ago, I referenced the probability that job creation was being overstated by the BLS, resulting in an erroneous decrease in the U3 unemployment rate, and that the BLS was due to provide revised figures on or about April 21. So far, they have not, but I will write about it when they do.
The importance of today's new-home sales, along with a continuing contraction in manufacturing activity in the 10th Federal Reserve district, as released by the Federal Reserve Bank of Kansas City this morning, is that they are consistent with all of the other measures of economic activity nationally for the past six to nine months.
The Federal Reserve officials have been consistent in referring to this trend as transitory due to the decline in oil prices starting last year and bad weather during Q1 of this year. I expect the Fed will have to begin to walk back from that stance imminently as it is evident, especially in the Fed funds futures indicating the probability of a rate hike in June now being at 2%, that the markets do not believe the issues are transitory or that the Fed can raise rates.
As I've written about in the past, I believe there is a greater probability of the Fed implementing another round of QE and for fiscal spending to increase to counteract the potential for a recession, than that the Fed will raise rates. I will write more about that in the near future, too.
With all of that as a preface, it means that both short- and long-term U.S. treasury yields are most probably very close to where they will be for the rest of this year at least. There remains a possibility for long-end yields to decline substantially if the Fed does not acknowledge an awareness of the real economic condition and walk back the rate hike rhetoric and narrative and the fiscal authorities do not recognize the need to raise the debt ceiling and federal spending. I will also write more about this in the near future.
In this environment, however, the mortgage REITs should continue to flourish.
In the past three months, five of the six mortgage REITs I track have declined slightly in price because of concerns about the potential impact of rising rates by the Fed. I expect that over the next three months, that process will more than reverse.
They all remain excellent income vehicles.
Annaly Capital Management (NLY) is down about 4% in the past three months. PennyMac Mortgage Investment Trust (PMT) is down about 6.5%, Chimera Investment (CIM) and American Capital Agency (AGNC) are down about 2%, and Capstead Mortgage (CMO) is down about 3%.
CYS Investments (CYS) is up about 1%.
These are not big moves and, as I've written in the past, should be disregarded by income investors.