Price Gains Signal U.S. Housing Market to Boost Growth
Comment of the Day

January 30 2013

Commentary by Eoin Treacy

Price Gains Signal U.S. Housing Market to Boost Growth

This article by Shobhana Chandra and Jeanna Smialek for Bloomberg may be of interest to subscribers. Here is a section
Mortgage rates near a record low will probably spur a third consecutive advance in home sales this year, which will keep property values rising. The resulting gains in home equity may help support consumer sentiment and spending, the biggest part of the economy, softening the hit from the two percentage-point increase in the payroll tax that took effect this month.

“Rising home prices are providing an important cushion,” said Millan Mulraine, a New York-based economist at TD Securities LLC, who correctly forecast the gain in values. Lower confidence and smaller paychecks “will slow consumer spending this quarter, but the effect will abate in coming months.”

The New York-based Conference Board's sentiment index fell to 58.6 this month, the weakest since November 2011, from 66.7 in December, the private research group said. The 8.1-point drop was the biggest since August 2011, the month after lawmakers wrangled over how to trim the budget deficit.

“The souring in moods is a reflection of the brinkmanship in Washington and the higher payroll tax,” Mulraine said.

Eoin Treacy's view Since the housing market represented the epicentre of the financial crisis, it is heartening to see that prices have at least stabilised over the last year. A quick look at the Case Shiller 10 Index highlights the fact that the 5.5% advance year over year is within the context of a market which is forming a potentially lengthy base.

Foreclosure rates peaked 2010 and have since continued to trend lower, representing declining new supply coming onto the market. It is perhaps for this reason that homebuilders have attracted such interest over the last 18 months as they completed relatively lengthy base formations.

One of the primary objectives of quantitative easing is to keep a lid on long-term yields in order to ease the burden on those who are refinancing mortgages and to improve affordability in the housing market more generally. Based on the impact this has had on housing the Fed will consider their policy to have been at least partially successful. However the question now is to what extent additional quantitative easing is required in order for the market to remain stable.

A competitive advantage in energy prices, a wide lead in technological innovation, major advances in healthcare on the cusp of coming to market, improving perceptions in the housing market, a slowly evolving renaissance in manufacturing, well advanced deleveraging in the consumer and corporate sectors and a contracting trade deficit suggest that the velocity with which money circulates through the economy may begin to pick up. This can be considered a best case scenario and there are significant issues with government debt, profligacy, budgets, overspending and political polarisation.

Following what has been a record month for stock markets, the Treasury market is beginning to raise eyebrows. The US 10-year yield found support in the region of 1.8%, which represents the upper side of the underlying trading range and the region of the 200-day MA. A sustained move below that level would be required to question potential for additional higher to lateral ranging.

We have pointed out on a number of occasions that perhaps the best way to monitor the consistency of the bull market in Treasuries is with the Merrill Lynch 10yr+ Total Return Index. The majority of fixed income investors, such as pension funds, approach the market from a total return basis and have been conditioned over the last three decades to buy the dips. The bull market in Treasuries will not have ended until this strategy fails. Therefore as the Index tests the region of the 200-day, where it has found support on every occasion since the early 1980s, a sustained move below the MA and an additional breakdown will be required to confirm a trend change.

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