Thursday 27 June 2013

Chart of the Day - Mortgage Debt and Housing Wealth

"He is richest who is content with the least, for content is the wealth of nature." - Socrates 

Looking at Pending home sales,  moving up 6.7% in May from a month earlier and 12.1% higher than a year ago with May’s index reading of 112.3 marks, the first time contract activity has grown at this rate since December 2006, when it hit 112.8, we thought the below Chart of the Day from Bank of America Merrill Lynch note entitled "Taper? Not so fast" from the 27th of June was fairly illustrative of both the deleveraging of the private sector and the wealth effect induced QE recovery courtesy of the Fed:
"Housing wealth increasing while mortgage debt declines: The rebound in housing construction is only one outcome of the recovery. We are also seeing a notable gain in home prices – running at 10% yoy – and a recovery in household balance sheets. The gain in home prices has translated to a $1.8tr increase in housing wealth, recovering nearly a third of the cumulative loss from the peak. Along with the gain in housing wealth, households have reduced mortgage debt burdens. Indeed, the decline in debt has been even more notable than the gain in housing wealth." - Bank of America Merrill Lynch

No doubt the link between consumer spending, housing, credit growth and shipping, a subject we discussed in January this year, has seen some improvement since the beginning of the year.

While US Family Housing Starts looks to be on the mend in conjunction with US Furniture sales, we have seen lately a small pick-up in the Baltic Dry Index - graph source Bloomberg:
 Since 2006:
- in yellow the Baltic Dry Index,
- in orange US Family Housing Starts
- in white US Furnitures Sales.

As we indicated in our January conversation:
"If there is a genuine recovery in housing driven by consumer confidence leading to consumer spending, one would expect a significant rebound in the Baltic Dry Index given that containerized traffic is dominated by the shipping of consumer products."

A resurgence in international container volumes is dependent on the housing market and any change in consumer spending trends is depending on a more pronounced housing market revival and will directly impact container traffic.

But, the latest dip in US Family Housing Starts and white US Furnitures Sales, warrants caution. As per the Fed's tapering comments, now it is all about economic data in the coming weeks and months.

Also Mortgage Rates for 30 years jumping to highest since 2011 from 3.93% to 4.46%, the biggest one week increase since 1987 according to Bloomberg and with the average 15 year rate climbing to 3.5% from 3.04% could also slow down the deleveraging process and dent somewhat the housing recovery process. The average rate for a 30-year mortgage in the 10 years through last week was about 5.3 percent, according to data compiled by Bloomberg. 

Unsurprisingly, the Mortgage Bankers Association shows credit availability has eased since last year, which again validates the points made back in our January 2013 about the link between consumer spending, housing, credit growth and shipping.

"Be careful to leave your sons well instructed rather than rich, for the hopes of the instructed are better than the wealth of the ignorant." - Epictetus 

Stay tuned!

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