400 days until Election Day 2020. Political uncertainty weighed on US equity markets last week following the release of a whistleblower complaint alleging wrongdoing by the President as both sides of the aisle dug into their respective trenches. The S&P 500 (SPY) finished lower for the second straight week, declining by 0.6% while the tech-heavy Nasdaq (QQQ) finished off by 2.0% as trade tensions between the US and China appeared to ratchet-up after reports that the Trump administration is considering restrictions on Chinese companies' access to US capital markets. Somewhat lost in the political circus, economic data over the past several weeks has been fairly solid with US housing markets completing the "perfect month" in August, beating expectations on all six of the major housing data points.
Helping to boost the more yield-sensitive equity market sectors, the 10-Year Treasury yield resumed its retreat, dipping back below 1.70% after briefly perking higher mid-month. Outside of the heavily-weighted cell tower sector, the real estate sector generally delivered another solid week as the broad-based REIT ETFs that exclude cell towers (SCHH and USRT) finished the week modestly higher while the REIT ETFs with heavy cell tower REIT exposure (VNQ and IYR) finished lower on the week. Eleven of the 15 major real estate sectors finished in positive territory on the week, led by the data center, shopping center, healthcare, and student housing REIT sectors.
The Hoya Capital US Housing Index, the benchmark that tracks the performance of the US Housing Industry, climbed higher on the week as the strong month for single-family housing data continued with a blowout New Home Sales report and strong Pending Home Sales data. Lower mortgage rates have been largely behind the recent resurgence in the single-family markets. The 30-Year fixed mortgage remains more than 100 basis points lower on a year-over-year basis. Also this week, the Mortgage Bankers Association reported that the Mortgage Purchase Index, a leading indicator of future home sales, rose 9% from the same period last year. The Real Estate Technology & Brokerage sector led the gains this week with strong individual performances from Realogy (RLGY) and Re/Max (RMAX).
While the peak of 3Q earnings season is still about a month away, homebuilder KB Home (KBH) reported strong third-quarter results, sending the stock higher by another 4% this week, pushing its YTD gains above 70%. Following the worst year for single-family home building sector (XHB and ITB) since the recession, we've seen resurgent order growth over the past several months with KB Home reporting a 24% jump in net orders with a decent improvement in homebuilding margins as pressure from lower home values was offset by the sharp year-over-year decline in lumber prices.
Following a trifecta of strong housing data last week, the streak continued into this week with a blowout New Home Sales report. While homebuilder earnings results and most other forward-looking metrics have indicated for some time that a housing market recovery is on tap for an acceleration in 2H19, the slower-reacting home sales data had been stubbornly slow to reflect these improved conditions. Well, patience is a virtue, as the pickup in single-family housing market activity is finally being reflected in the sales data. In August, New Home Sales surged 18% from last year, the third consecutive month seeing growth above 9%. June's revised rate of 729,000 units was the strongest rate of sales in 12 years.
Despite the strong data this summer, the rate of new home sales remains far below historical averages, underscoring a continuing theme of the post-recession period: the lingering underinvestment in new home construction. New home sales peaked in 2015 at an annualized rate of 1.39 million and bottomed in 2011 at a rate of 270k. While existing home sales - which account for 90% of the home sales market - quickly recovered most of the lost ground after the housing crisis, new home sales remain far below even 1990s' levels. Besides continued tight supply in the single-family markets, a secondary effect of the relative underinvestment in new single-family homes is the aging of the housing stock. The median age of a single-family home in the US is nearly 40 years old according to the American Community Survey, the oldest on record.
As we've been discussing since February amid a wave of bearish sentiment on the single-family housing markets, we continue to view the slowdown in 2018 and forecasted reacceleration in 2019 as more akin to the post-taper-tantrum conditions of 2014 and 2015 than to anything like the pre-bubble period of 2007. In the wake of the "taper tantrum," the 30-year mortgage rate shot higher by 120 basis points, prompting a significant slowdown in single-family housing data over the next year before bouncing back strongly in 2015 as rates again pulled back. At 3.64% according to Freddie Mac, mortgage rates are lower by 108 basis points from the same period last year and are a steep 130 basis points below their peak last November. Over the past decade, there has been a very strong correlation between changes in mortgage rates and growth in new home sales, as highlighted in the chart below.
Earlier this summer, we reported that for the first time since early 2018, inventory levels of both new and existing homes are again retreating, and we expect this retreat in inventory to again put upward pressure on home values following a period of moderation that began in mid-2018. Inventory levels were building throughout all of last year as mortgage rates rose sharply and homebuilders had some mild difficulty dealing with an excess supply of newly completed homes. Corresponding with the sharp pullback in mortgage rates, inventory levels have been on a continuous decline since late 2018, which may keep a lid on the upside growth potential of existing home sales.
As we discussed in our quarterly update on the homebuilding sector, in the market-level home price data and the new home sales regional data below, we note the divergence between the weak-performing coastal markets and the better-performing sunbelt markets. Feeling the effects of tax reform and the cap on SALT deductions, home sales in the relatively high-tax Northeast and West Census regions continue to lag the national averages. New home sales in the South climbed 6.0% in August while sales in the West jumped by 16.5%. But sales tumbled 5.9% in the Northeast and Midwest regions, however, saw sales fall by 5.9% and 3.0%, respectively. The Northeast region now accounts for less than 5% of total new home sales while the South Census region accounts for more than 50% of new home sales. Demographics are especially weak in the northeast markets where boomers outnumber millennials by nearly 20%, adding extra headwinds on home values and home sales over the next decade.
The US consumer has shown signs of resilience despite the growing drumbeat of recession warnings from the financial and mainstream media and the seemingly never-ending political circus in DC. Personal income rose by 4.6% in August from last year, which was in line with estimates and marked the 25th straight month of income growth above 4.5%. While consumers continue to see healthy wage growth, some early signs of jitters may be emerging as personal spending rose by 3.8%, coming in shy of estimates as the savings rate ticked up to 8.1%. The Michigan Consumer Sentiment Index, however, beat estimates while the Conference Board Consumer Confidence Index ticked lower in September.
Home price appreciation moderated meaningfully from mid-2018 through early 2019, but has shown early signs of stabilization and even reacceleration in recent months amid a favorable backdrop of lower mortgage rates. The Case Shiller National Home Price Index showed a 3.2% year-over-year gain in July, matching the lowest rate of growth since 2012, but the pace of slowdown has all-but-stopped in recent months. Faster-responding home price data series have started to reflect stronger conditions in recent months with the FHFA index ticking higher to 5.0% from 4.9% in the prior month. Average New Home Prices are higher by 6.1% from last year to $404,200 which was the highest monthly average sales price on record.
As shown below, home price appreciation has tracked disposable personal income per capita growth most closely over the past three decades. By this measure, home prices have generally outpaced income growth in the post-recession period amid a lingering undersupply of housing in many major markets, but home prices are not terribly out of line with income growth. Housing costs - already the single largest spending category for the average American - have accounted for a growing share of total household spending over the past several decades, amplified by the growing housing shortage affecting many major metropolitan markets. That said, unlike in the "housing bubble" period, home prices are not significantly above total income growth (Index: 1995) following the steep post-recession correction in home values.
With this past week’s outperformance, with gains of more than 24% so far this year, the broad-based REIT ETFs (VNQ and IYR) continue to outperform the S&P 500, which has climbed roughly 18%. Not all REITs are seeing the windfall, however, exhibited by the 55% performance gap between the best- and worst-performing REIT sectors. The US Housing sector has climbed 27% this year led by the 50% surge in Homebuilders. At 1.68%, the 10-year yield has retreated by 101 basis points since the start of the year and is roughly 160 basis points below peak levels of 2018 around 3.25%.
This week, we published Hotel REITs: Airbnb's WeWork Problem. Hotel industry performance, inexorably linked to key economic indicators like job growth and corporate profitability, has softened over the last quarter amid signs of a clear slowdown in global growth. Industry forecasts for the rest of 2019 have been revised meaningfully lower by all of the leading research providers. RevPAR is now expected to grow just 1% this year.
Guidance cuts were the name of the game for Hotel REITs in 2Q with more than half the companies in our coverage lowering full-year RevPAR and FFO expectations. Hiding in the shadows of the recent WeWork drama has been a similar venture-capital-backed "real estate technology" company, Airbnb, which shares more than a few parallels to WeWork. The dire projections of Airbnb crushing the traditional hotel industry have not come to fruition and we foresee Airbnb facing similar scrutiny as WeWork if it proceeded with IPO plans.
The economic calendar this coming week is highlighted by employment and PMI data. While the consumer has shown signs of resilience, the US manufacturing and industrial sector has slowed more significantly over the last year following a strong reacceleration through 2018. Sometimes forgotten is that industrial and manufacturing production already had a significant contraction during this recovery between 2014 and 2016 before reaccelerating after the 2016 election and the tax reform package of 2017. Manufacturing PMI data is released on Tuesday, as is construction spending. ADP employment data is released on Wednesday while BLS data is released on Friday with expectations of around 145k in job growth.
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