Is the housing market finally slipping?
May 18, 2006
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Our words two weeks ago could almost be repeated verbatim because the important stock markets such as the Dow Jones Industrial Average and the FTSE 100 are pretty well at the same place as they were then. This continues to underline our concern about the lack of upside momentum even though some weeks ago the Dow Jones Industrial Average made a break above the 11000 level. The one thing that we can be certain of is that this uncertain period will end and eventually major stock markets will either surge upwards or fail awfully.
To our eyes, oil above $70 per barrel and gold above $600/oz are harbingers of stock market woe and the longer it goes on, the more concerned we are that any move to the downside will be dramatic. If so, the bear funds that most portfolios still hold will benefit very considerably.
Not surprisingly, UK retailers continue to suffer. The British Retail Consortium reported that in March retail sales were 1.6% lower than in February, so that the subsequently lower Easter figures would have further disappointed. It is hardly surprising bearing in mind the level of consumer indebtedness and the additional pressure upon their disposable income by petrol prices almost at £1 per litre. To add further fuel to the fire, unemployment in March was up 12,600.
Back in the late 1980s before the housing market collapsed, groups of young people joined together to buy properties.
They did this for affordability reasons, only by joining their income with others could they afford the prices. Many of those arrangements ended in tears as house prices fell, negative equity occurred and worse still one or other of the partners in the purchase was unable to meet their financial liability.
Clearly we don’t learn from the lessons of history because this week in the FT it was reported that homebuyers are flocking to a joint-purchase website Sharedspaces.co.uk. Since it opened for business a month and a half ago, more than 1,500 people have signed up to join the website that pairs up strangers for the purpose of buying property together. Probably a whole load of new accidents waiting to happen.
On Tuesday, 18th April, the latest Fed Minutes were published; they reported that members of the Open Market Committee were surprised by the lack of any increase in inflation pressure. Most members thought that the end of the tightening process was likely to be near, some expressed concern about the dangers of tightening too much, given the lag in the effects of policy. This was viewed as good news and that the Fed would raise rates, at most, one more time. The stock market took off, the Dow rose 195 to 11269, its best day for two years. Then on the next day it was reported that the Consumer Price Index for March was up 0.4% compared to 0.1% rise in February. The Dow managed to rise only 10 returning to its lacklustre performance and intimating that any further significant break to the upside is unlikely.
We continue to watch the US house market which, in our view, is the world’s key economic indicator. What we see is ongoing deterioration:
• The National Association of Home Builders Index for sales of new single-family homes fell to 50 in April from 54 in March.
• The National Associations of Realtors said that 40% of all home purchases last year were for second homes of which two thirds were for investment purposes.
• The Daily Reckoning this week reported that Brad Inman of Inman News, which tracks the real estate industry,
recently gave real estate agents the opportunity to blog about market conditions. They almost uniformly described them as bad and getting worse. The following are some of the examples:
“Portland, Oregon is mixed… more inventory, sitting longer … Sellers no longer king.”
“Minneapolis/St Paul … 15 houses per buyer. If we had buyers. Huge inventory in every price range. More foreclosure
properties coming on daily.”
“Northern Cal. Let’s not beat around the bush here. There is a slow-down!! Home prices not going up. Sales are down.”
Apparently Japanese consumers were more confident in March than any time since 1991. A government survey released this week underlined growing public conviction that the terrible period since 1990 is over. The cabinet office survey, seasonally adjusted on a quarterly basis, rose to 48.2 in March from 47.9 in December. This compares to a peak of 50.8 in 1988, the height of the bubble exuberance.
It gives us a warm feeling because portfolios generally are decently exposed to the Japanese stock market which we have repeatedly said is now in the early stages of a long-term bull market which should eventually take the Nikkei Dow well above its level of about 40,000 set in December 1989.
Could any serious weakness in America and the rest of the world undermine Japanese stock markets? The answer is, of course, yes it could. For that reason, we monitor closely but suspect that any setback in Japan will be manageable and will lead to a further rally whereas any setback in the US could lead to plunging new lows.
By John Robson and Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit http://www.rhasset.co.uk/
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