StreetSmartPost

Saturday, July 26, 12 noon.

Let’s see now.

Housing affordability increased dramatically from 2006 when the housing bubble burst, and house prices began plunging, while at the same time interest rates plunged to near zero and mortgage rates fell to record lows.

As a result, housing began leading the economy out of the Great Recession even as unemployment grew and jobs were being lost monthly. Chart is of existing home sales only to July of last year.

However, the housing recovery began to unravel about 15 months ago. The increasing sales demand created by low prices and low mortgage rates had home prices beginning to rise, and mortgage rates also reversing to the the upside.

According to the Federal Housing Finance Agency (FHFA), home prices have risen 22% since June, 2011. And 30-year mortgage rates for well-qualified borrowers have risen 20% since January 2013 (from 3.4% to 4.1%).

The sweet spot for selling a home began going away in 2006 when the housing bubble began to burst. And in 2012 the sweet spot for buying a home began to fade.

Those rising home prices and rising mortgage rates translate to roughly a 40% increase in monthly payments on new mortgages over the last 18 months, which is reflected in this chart from the St. Louis Fed showing the dramatic plunge in its Housing Affordability Index.

Meanwhile, the economy and housing slowed in the winter months, blamed entirely on weather. Therefore a sizable rebound in housing from pent-up demand was expected in the spring.

So far, at least in the housing sector, that rebound is not showing up. In fact, if anything the housing industry is in a more pronounced funk than prior to the winter months.

It’s not that the warning signs have not been plentiful.

Existing Home Sales rose a rather tepid 2.6% in June. That was higher than last October, and fractionally better than the consensus forecast, but still 2.3% lower than the pace a year ago.

New home starts fell 6.5% in May, and permits for futures starts fell 6.4%, not boding well for June and July new home sales.

And sure enough, this week we learned that new home sales plunged 8.1% in June to an annualized rate of just 406,000. Rather than a rebound, that was an even slower pace than three months ago. It missed the consensus forecast for 475,000 by a wide margin, and has new home sales not rebounding, but instead 11.5% lower than June of last year.

Looking ahead.

Affordability. The latest read on the FHFA Home Price Index showed home prices rose another 0.4% in May. So even though mortgage rates have stabilized at current levels, at least for now, affordability for potential home-buyers is still deteriorating.

Realtors have been claiming the lower inventory of homes available for sale was the problem. If so, the report that the number of homes on the market increased by 6.5% in June from a year ago, will be a positive. The longer homes remain on the market and the more there are of them, the more pressure increases for sellers to cut prices. If prices start to come down again, it may improve affordability. That’s a lot of ifs.

Meanwhile, applications for new mortgages were down sharply in June and in the first two weeks of July.

This week the Mortgage Bankers Association reported a small 2.4% increase in mortgage applications last week.

However, it was mostly applications for refinancing of existing mortgages by current home-owners, which were up 4.0%, and not by those looking to buy a home.

But even applications for refinancing mortgages are down 40% from a a year ago, and after their further declines in June and July. And mortgage applications for home purchases are down 15% from a year ago.

It looks more like instead of rebounding in the spring and summer, housing continues the slump that began more than a year ago.

And while the Fed did not see the warning signs, it looks like the major banks and lenders saw them clearly, and were correct in closing down mortgage offices and laying off thousands of employees several months ago, forecasting that their mortgage business would be down 30% to 40% this year, and not recover to any degree next year.

How company stock buy-backs can mislead investors.

Investors and the media tend to look on corporations buying back their own stock as a sign the company believes its future is looking bright.

For instance, from an article on Business Insider on Thursday: “Caterpillar just announced Q2 earnings that beat Wall Street’s estimates and announced a big stock buyback. This could be good news for the whole economy. As a global supplier of construction and mining equipment, Caterpillar is a bellwether of economic activity.”

However, companies buying back their own stock is often just a means of removing shares from the public float to improve their price/earnings ratio. (With fewer shares to divide earnings over, the earnings per share go up even though the overall profits may go down).

So here is a different take on Caterpillar’s announcement  from Tyler Durden on Zerohedge on Thursday.

“Earlier today, Caterpillar reported its monthly global OEM retail sales. It didn’t get any press coverage for one simple reason: Through stock repurchases, Caterpillar has managed its stock to all time highs in recent months and hardly wants the investing public to know the unpleasant truth, a truth which is shown in its simplest format in the chart below: Starting in December 2012 and continuing through today, Caterpillar has reported 19 consecutive months of declining global year-over-year retail sales. The last, and only, time it had 19 consecutive months of such decline? The period starting in October 2008 just when Lehman filed for bankruptcy.”

Durden says, “So I guess if the previous time was the Great Financial Crisis because stock prices plunged, we can call this the Great Recovery?”

Here is Caterpillar’s stock action through the same period. Did Caterpillar manage its stock price higher with stock buybacks that kept the sales per share and P/E ratio lower, hiding the company’s true business trend?

To read my weekend newspaper column click here:  China’s Market Finally Looks Like a Buy

Subscribers to Street Smart Report:

In addition to the charts and signals in the ‘premium content’ area of this blog, there is an in-depth Markets Update (stock market, gold, and bonds) from Wednesday in your secure area of the Street Smart Report website.

Non-Subscribers:

Check out our new bull market/bear market indicator (BBMI) by clicking here: Market Timing Strategy !

U.S. market yesterday.

A negative day on light volume of under 0.6 billion shares traded on the NYSE,

The Dow was down as much as 168 points, but last hour buy-programs spiked it up to a loss of only 123 points.

The Dow closed down 123 points, or 0.7%. The S&P 500 closed down 0.5%. The NYSE Composite closed down 0.5%. The Nasdaq closed down 0.5%. The Nasdaq 100 closed down 0.5%. The Russell 2000 closed down 1.0%. The DJ Transportation Avg. closed down 0.5%. The DJ Utilities Avg closed down 0.7%.

Gold closed up $16 an ounce at 1,307, but down $3 for the week.

The U.S. dollar etf UUP closed up 0.2%.

The 20-yr bond etf TLT closed up 1.2%.

Asian markets closed mixed in their last session of the week.

Asian markets closed mixed Thursday night (Friday in the U.S.).

The Asia Dow closed just about flat, up 0.1%.

Among individual markets:

Australia closed down 0.1%. China closed up 1.0%. Hong Kong closed up 0.3%. India closed down 0.6%. Indonesia closed down 0.2%. Japan closed up 1.1%. Malaysia closed up 0.1%. New Zealand closed up 0.4%. South Korea closed up 0.4%. Singapore closed down 0.1%. Taiwan closed down 0.9%. Thailand closed unchanged.

European markets closed down quite sharply yesterday.

The London FTSE closed down 0.4%. The German DAX closed down 1.5%. France’s CAC closed down 1.8%. Belgium closed down 0.9%. Denmark closed up 0.3%. Finland closed down 0.3%. Greece surged up 2.7%. Ireland closed down 0.5%. Italy closed down 0.9%. The Netherlands closed down 1.3%. Norway closed down 0.9%. Portugal closed down 0.3%. Spain closed up 0.3%. Switzerland closed down 0.8%.

Global markets for the week. 

Asia continued to come alive. Not much movement either way elsewhere.

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In the premium content area this morning: Charts and signals on the U.S. stock market, gold, and bonds, signals (long-term, intermediate-term, and short-term), and analysis of each.

Thursday, July 24, 9:25 a.m.

Although historically a correction of 10% has come along on average of once a year, we haven’t had a 10% correction since 2011 (that was actually a 19% correction).

As a result the market has gone for a rare 1,021 days without a 15 to 20% correction. The last time it went that long was 30 years ago, when it went 1,127 days from July, 1984 to August 1987. That ended with the 1987 crash, with the S&P 500 down 37%.

No wonder then that investors are currently extremely complacent, so much so that even Fed Chair Janet Yellen said investor complacency was one of her worries.

If we were ever to have one again, not that we ever will, but what would a 10% or 20% correction look like?

A 10% decline would take the Dow down to 15,377, its level at the January low, also its level in May, of last year.

A 20% decline would take it down to 13,676, wiping out all of this year’s gain to date, and almost all of last year’s.

But then, no one expects those previous kinds of normal market volatility to happen any more. So why even think about it.

To read my weekend newspaper column click here:   Will Investors Get Out On Time This Time-

Subscribers to Street Smart Report:

In addition to the charts and signals in the ‘premium content’ area of this blog, there is an important hotline from 8 a.m. this morning, and an in-depth Markets Update (stocks, gold, bonds) from yesterday in your secure area of the Street Smart Report website.

Yesterday in the U.S. Market. 

A mixed but mostly positive day, on light volume of under 0.6 billion shares traded on the NYSE.

The Dow closed down 25 points, or 0.2%. The S&P 500 closed up 0.2%. The NYSE Composite closed up less than 0.1%. The Nasdaq closed up 0.4%. The Nasdaq 100 closed up 0.6%. The Russell 2000 closed up 0.2%. The DJ Transportation Avg. closed up 0.2%. The DJ Utilities Avg closed unchanged.

Gold closed down $2 an ounce at $1,305.

The U.S. dollar etf UUP closed up 0.1%.

The 20-yr bond etf TLT closed down 0.1%.

European Markets closed well off their highs and barely positive yesterday.

The Europe Dow closed up less than 0.1%,

The London FTSE closed up less than 0.1%. The German DAX closed up 0.2%. France’s CAC closed up 0.1%. Belgium closed up 0.4%. Denmark closed unchanged. Finland closed up 0.5%. Greece closed up 0.2%.  Ireland closed up 0.4%. Italy closed down 0.2%. Netherlands closed up 0.1%. Norway closed up 0.3%. Portugal closed up 1.7%. Spain closed up 0.1%. Switzerland closed up 0.1%.

Asian Markets closed up last night.

The Asia Dow closed up 0.4%. Among individual countries:

Australia closed up 0.2%. China closed up 1.3%. Hong Kong closed up 0.7%. India up 0.5%. Indonesia closed up 0.1%. Japan closed down 0.2%. Malaysia closed up 0.2%. New Zealand closed up 0.6%. South Korea closed down 0.1%. Singapore closed up 0.4%. Taiwan closed up 0.3%. Thailand closed up 0.2%.

Subscribers Premium Content Area.

For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.

NOTE: To gain access call our subscription office at 1-386-943-4081 (week-days only). If you can afford two cups of coffee a week you can afford the cost of 25.95 a month ($6.50 a week). For that you also receive the full Street Smart Report advisory service (newsletter, hotlines, in depth mid-week reports on stocks, gold ,bonds, etc.). Or to subscribe online click here:https://streetsmart.securesites.net/order.html