The Fed released its quarterly report on US Household Net Worth and, at the end…
Global markets were jolted Friday morning as the results of the UK vote showed that 52% of voters wanted Britain to leave the European Union. The British Pound fell to its lowest level since 1985, and British Prime Minister David Cameron resigned. The markets had been assured by the British government and many pundits that a “Brexit” was never going to happen, but the rank and file English voter saw things differently. 72% of eligible UK voters turned out to cast ballots, compared to a 53.6% turnout in the 2012 US presidential election. They saw it as a vote on British sovereignty. They were angered by decisions made by the EU in Brussels by European bureaucrats that left them (the British) out of the decision-making process. It was also a blow to the concept of a one-world government, as most voters preferred to be able to handle local issues locally.
We cautioned a few weeks ago that a Brexit would initially cause a panic, however we’re not convinced that it’s the end of the world as we know it. The idea of the EU made a lot of sense in the years after WWII as Europe tried to pull itself from the rubble and looked East to an aggressive USSR that was hungry for war spoils it believed it deserved. Banding together to trade more efficiently and to strengthen their economies to ward off the siren song of communism made sense.
Today, things are different. As the Wall Street Journal wrote earlier in the week, “A centrally-planned, regional customs union….might have made some sense in the 1950’s. That was before container shipping, budget airlines, the internet and the collapse of tariffs under the World Trade Organization made it as easy to do business with Australia and China as with France and Germany.”
Further, “… the EU’s obsession with harmonization (of currency and rules) frustrates innovation. Using as an excuse the precautionary principle or the need to get 28 countries to agree, the EU gets in the way of the new. Consequently, we’ve (Europe) been left behind in digital technology: There are no digital giants in Europe to rival Amazon, Google, Apple or Facebook.”
The EU had subjugated Britain’s right to sign trade agreements (it was Britain who pioneered the idea of unilateral free trade in the 1840’s), and those that were signed were relatively small agreements which focused almost solely on the trade of goods and excluded services – Britain’s strongest sector (like the US). In short, the EU had become a bloated behemoth whose trade choices (and management in general) had been so overrun by lobbyists (especially big business) that it makes Washington, DC look wholesome by comparison.
While the “odds makers” put a low probability (25%) on the UK leaving the EU, polling data showed that the odds were pretty much a coin flip. Still, the results hit global stocks hard, with Morgan Stanley’s global stock index off 4.8% Friday – the biggest slide since last August. In the US, the Dow finished the day down 600 points (off 3.7%) on the biggest trading day of the year (13 billion shares traded). The 10-year Treasury Note fell 30 basis points initially (from 1.70% to 1.40% – just above the all-time low of 1.38%, set in July 2012) before finishing the day down 14 bps (1.56%).
Here at home, there was more good housing news this month as Existing Home Sales rose 1.8% in May – their third consecutive monthly gain – to the fastest pace since 2007. Sales in the largest sector of the US residential real estate market hit a 5.53 million annual rate and are up 4.5% from a year ago. Non-cash purchases (buyers using a traditional mortgage) are up 7.3% from a year ago, suggesting more buyer-friendly lending standards. Supply (or lack thereof) and rising prices continue to hurt sales. Inventories did rise 1.4% in May, but remain 5.7% below year-ago levels. There are only 4.7 months’ supply of homes for sale. Demand was so strong in May that properties typically only lasted on the market for 32 days (the shortest duration since the NAR began tracking such data in May 2011), and 49% of properties sold in less than a month. Demand is also driving home prices higher. In fact, the median price for an existing home rose to an all-time high in May and sits 4.7% higher than a year ago. The median year-over-year price has risen for 51 consecutive months and should, hopefully, pull more sellers into the market.
Housing Starts eased 0.3% in May, after rising 4.9% in April, as home building continues to bolster the US economy. Starts in May were up 9.5% from a year ago (to a 1.16 million annual pace), pushed by both single-family and multi-family construction. The 12-month moving average of starts is at its highest level since 2008, while the number of multi-family units currently under construction is the highest since the early 1970’s. Over the past 6 months, there has been a dramatic shift towards single-family home building. Single-family building permits are up 4.8% from a year ago while multi-family permits are down 28.1%. The shift in the mix of homes will help US growth because, on average, each single-family home contributes to GDP about twice the amount of a multi-family unit.
Sales of New Homes took a break in May after rising to the fastest pace in eight years in April. Sales fell 6% from April’s hot pace but, despite the negative number, May sales were the second best reading since February 2008. Home sales are volatile month-to- month, and it’s important to focus on the trend, which remains positive. With employment gains and a bit of a thaw in mortgage financing along with stronger wage growth, the prospect of buying a home is within reach of more people. A lot of the population is renting, leaving plenty of potential buyers as conditions continue to improve.
The median sales price of a new home fell 9.3% in May, but is still up 1.0% versus a year ago. Price gains may be muted due to a change in the “mix” of homes sold toward the lower end of the price spectrum.
In other housing news, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.2% in April and is up 5.9% from a year ago. In the year ending in April 2014, FHFA prices were up 5.6%. The NAHB index, which measures sentiment among home builders, rose to 60 in June – the highest level since January.
Orders for Durable Goods fell 2.2% in May, following a combined rise of 5.3% in March and April. Military aircraft and motor vehicles led orders lower in May, but most major categories were lower as well. Excluding the volatile transportation sector (where a Boeing order can swing the overall report in a big way), total orders fell 0.3%. The biggest drag on orders in the past year has been machinery but, given the rebound in energy prices, that should end soon and business investment should pick up in the months ahead.
Shipments of “core” capital goods (non-defense, excluding aircraft) declined 0.5% in May, but were down a more modest 0.2% including upward revisions to prior months. This is the part of the report that the government uses for calculating GDP. Speaking of which, Q2 GDP is shaping up to come in around 2.0%. Next week, we will see the second revision to Q1 GDP. The markets expect the final data to show 1.1% growth – quite a bit higher than the initial read of 0.5%.
The UK vote will continue to roil the markets for a bit, but things will eventually settle down. Those who remember last August will recall that the Dow fell 2,000 points over the course of the month as China devalued its currency and pundits cautioned (again) that economic Armageddon was fast approaching. The markets hate change and the business “experts” revel in fanning the flames of panic. In the end, the Brits were probably correct in throwing off the yoke of regulatory burdens imposed by “foreign” bureaucrats.
While talk of Britain’s demise is rampant, the British Pound has simply returned to Earth when compared to the US Dollar. At $1.37 to the Pound, they are close to being “equal.” PPP means Purchasing Power Parity and the green line below shows where the Dollar / Pound exchange would have traded over the past 40 years based on the inflation rates between the two countries.
In the meantime, the market volatility offers a great buying opportunity – whether it’s the stock market or for those in the midst of financing. Low interest rates offer the chance to lock up capital at very attractive rates. With the odds of a US recession over the next 12 months low, and inflation on the rise, borrowers would do well to take advantage of the “gift” Brexit has afforded them while they can.