Hot Fun in the Summertime for Housing and the Economy

Happy summer! This is the season when the economy, investors and workers often take a breather, though this year, there is hope that a bit of spring will pervade the next few months. The much hoped for housing recovery never took hold during the normally vibrant spring buying/selling season. And after a weaker than expected report on housing starts and a slump in mortgage activity last week, investors are bracing for more details about the nation’s real estate market. This week, there will be data on new and existing home sales activity, as well as prices. Bad first quarter weather-related weakness aside, part of the recent slowdown in housing is attributable to sheepish buyers, who were spooked by rising prices, especially in certain hot housing markets. Between April 2013 and April 2014, the median national price for an existing single-family home rose 4.7 percent to $201,100, according to the National Association of Realtors, while during the same time period, rates on 30-year fixed-rate mortgages increased by 0.7 percent to 4.14 percent, presuming that you qualify for a loan. (While it has become a bit easier to secure mortgage financing, credit scores remain critical to the process. The average FICO score on accepted residential mortgage applications for home purchase has fallen from 742 to 726 over the past year, which is above the average score for US households of 690.)

The drop off in housing activity caused residential investment to be a drag on economic growth in the first quarter of the year. This week, the government will release its third and final estimate of first quarter economic growth, which is likely to show that the economy contracted by more than the one percent reading that was previously reported. Some economists are predicting that the economy shrank by as much as two percent in the first three months of the year.

But that is all in the past, according to the analysts at Capital Economics, who anticipate that the recovery “is finally about to shift into a higher gear.” To what do they attribute the ebullient outlook? An steadily improving labor market, which is likely to augment wage growth in the second half of 2014 and beyond; an increase in consumer spending, which will be boosted by the afore-mentioned income growth; a pick up in business investment after a two year pause; a federal government which has temporarily stopped creating problems in the form of debt ceiling crises; and the wealth effect from the rising stock and housing markets, coupled with a drop in household debt.

Nowhere was that wealth effect seen more clearly than in the most recent Cap Gemini SA/Royal Bank of Canada analysis of the world’s millionaires. Nearly 2 million people around the world became millionaires (defined as having at least $1 million dollars in investments such stocks, bonds, cash, and primary residences) last year, a 15 percent increase from a year ago. There are now a record 13.7 million millionaires, who are sitting on $46.2 trillion dollars.

MARKETS: Investors are feeling mellow, according to the St. Louis Fed, which announced that its Financial Stress Index fell to its lowest level since the regional bank started tracking the data in 1993. This jibes with the fall-off in the volatility index (VIX), which is hovering at seven-year lows. You might excuse investors for getting a bit complacent. After all, Friday marked the 45th straight day that the S&P 500 closed up or down less by than 1 percent, the longest stretch of muted market action since 1995.

• DJIA: 16,947, up 1% on week, up 2.2% YTD (11th closing record of the year)
• S&P 500: 1962, up 1.4% on week, up 6.2% YTD (22^nd record close of year)
• NASDAQ: 4,368, up 1.3% on week, up 4.6% YTD (highest close since April 7, 2000)
• 10-Year Treasury yield: 2.63% (from 2.6% a week ago)
• July Crude Oil: $107.26, up 0.3% on week
• August Gold: $1316.60, up 3.3% on week
• AAA Nat'l average price for gallon of regular Gas: $3.68 (from $3.59 a year ago)

THE WEEK AHEAD:

Mon 6/23:

8:30 Chicago Fed

10:00 Existing Home Sales

SCOTUS to rule on legality of online broadcaster Aereo

Tues 6/24:

9:00 Case-Shiller Home Price Index

10:00 New Home Sales

10:00 Consumer Confidence

Weds 6/25:

8:30 Durable Goods Orders

8:30 Q1 GDP (Final reading)

Thurs 6/26:

8:30 Weekly Jobless Claims

8:30 Personal Income/Spending

Fri 6/27:

9:55 Consumer Sentiment