Optimism Abounds, Dark Clouds Circle
An ex-borrower of mine told me over lunch that business at his housing tracts had slowed and he was pulling back. I asked if he believed the lull to be a temporary market condition.
“Oh yeah. It has to be. The economy is so strong,” he said matter-of-factly. “Do you know something I don’t?”
I mumbled something about Italian banks on the brink of failure.
A quizzical look was his only response, looking at me as if my tin foil hat was on crooked.
I’ve come to realize an entrepreneur’s first attribute is seeing each and every glass as half full.
The economy is great we’re told. Vote Republican and get more of it. “It” being--winning.
However, the KBW Bank Index hit a 52-week low today. The index of small bank stocks is getting hammered. The index of European bank stocks continues to be bludgeoned by the market. And, the home builder’s index peaked in January, with big builders Lennar and DR Horton now making 52-week lows.
Perhaps these prices don’t mean anything. Anthony Deden spoke recently at the Grant’s Interest Rate Observer Fall Conference and excerpts of his talk appear in the latest Grant’s. “We all talk about financial markets, but we don’t have genuine markets in the sense that they are free from coercion or intervention,” said Deden. “If we don’t have real markets, we have no price discovery.”
“Indeed, we look to prices on an exchange to reckon value, having failed to see that wealth creation via the stock market does not create resources in the economy,” Deden continued. “We don’t see that booming markets without savings is not an accumulation of resources but an accumulation of claims on existing resources.”
So, perhaps Deutsche Bank’s share price, north of $152 on May 7, 2007, was no reflection of the banking behemoth's resources at all. What of today’s price of $10.73?
Meanwhile, technology has changed the housing market. It’s constantly preached that 6 months of resale inventory is normal and healthy. Rick Palacios, Jr. of John Burns Real Estate Consulting says 4 months is the new 6 months. He wrote recently,
technology has shattered the balanced market months of supply conventional wisdom, shaving roughly two months off the time required to sell a home. Homes can enter escrow today within 24 hours of listing, compared to prior periods when it took at least 30 days for the first open house. For a refresher on why we think roughly 4 months of supply is the new buyer/seller equilibrium, see our May 2017 piece Permanent Tech Disruptions to Home Sales.
Currently, resale listings are rising while the pace of home sales is falling. As a result, months of supply has risen from a cycle low of 3.2 in December 2017 to 4.3 as of August 2018 (most recent national figure). So why is this important? If we’re right, nationally we’ve already entered the early stages of a buyer’s market. Should supply levels cross above five months we’ll be watching for flat, possibly declining resale prices in some markets, especially where affordability is already very stretched.
In Las Vegas the months supply figure has jumped from 1.8 to 2.5 according to Home Builders Research. The optimist will say, “still tight,” the pessimist might say, “Ut Oh.”
Oh, as for Italian banks, Bloomberg reports, “The bond spread, public debt held by banks and new European Union banking rules are straining Italy’s financial system, which ‘may generate the need to recapitalize some institutions that already have capital fragility,’ Cabinet Undersecretary Giancarlo Giorgetti said in comments published Sunday.”
Always gauging the public’s mood, the folks at Elliott Wave Financial Forecast pointed out on September 28th, “Today, one sentiment indicator after another tells us that the mass of investors believes that new all-time highs are not to be feared, but expected. Our view is the opposite.”