Wall Street Breakfast: Housing Inflection Point

Apr. 19, 2022 7:35 AM ETXHB, SPY, APO, TWTR, AAPL, NFLX, SHEL, PTON, BCS, HAS, QQQ105 Comments16 Likes
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Housing inflection point

Investors will get more data on the U.S. housing market today as analysts point to signs of cooling in the red-hot sector. Housing starts and building permits numbers for April are due. Economists expect groundbreaking on new homes to drop to an annual rate of 1.745M, while permits are seen edging down to 1.825M.

Demand for homes is strong, with many properties for sale going for well above asking price. But with a hawkish Fed and the Treasury yields jumping, the 30-year fixed-rate mortgage just topped 5% for the first time in a decade.

"Rising rates are starting to show up in housing data," Schwab's Kathy Jones tweeted. That could further dent demand, although "housing starts have historically been unresponsive to changes in mortgage rates in a supply-constrained environment, likely because homebuilders are able to continue building with little fear that homes will sit vacant after completion,” Goldman Sachs said.

Yesterday, the NAHB Housing Market Index fell to a seven-month low of 77 for April. “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” NAHB Chief Economist Robert Dietz said.

Redfin reported last week that home sales fell 4% in March as buying costs shot up. “We expect the combination of surging mortgage rates and record-high home prices to cause more homebuyers to drop out of the market," Redfin chief economist Daryl Fairweather said. "Unfortunately, homeowners are turning their back on the market too. Instead of being motivated to list before prices weaken, potential home sellers may be choosing to wait-out the impending market cooldown.”

Stock impact: The "inexorable rise in back end rates is having a meaningful impact on interest rate sensitive areas of the economy and market, like housing," Morgan Stanley equity strategist Mike Wilson said.

The SPDR Homebuilders ETF (XHB) is down nearly 30% year to date and off 15% from its near-term peak in mid-March. The S&P 500 (SP500) (SPY) is down about 8% year to date. The sector is also vulnerable to the risk of the Fed orchestrating a hard landing with its rate hike, possibly leading to a recession. But Citi says that a replay of 2008 isn't in the cards.

"We believe the housing risk is much less severe than occurred during the Great Financial Crisis since credit quality is healthy, home equity levels are high, and there is higher structural demand for the home than pre-pandemic," analyst Steve Zaccone wrote in a note. (5 comments)

75-basis-point rate hike?

St. Louis Fed President James Bullard said he wouldn't "rule out" a 75 basis-point increase, "but it isn't my base case.” The market has priced in a 50-basis-point hike for the May meeting, kicking off a ramped-up tightening cycle.

Bullard emphasized that the fed funds rate should be lifted to 3.5% at a minimum by the end of this year. That would be more than 300 basis points above the effective rate of 0.33% - recall the Federal Open Market Committee, during its March meeting, hiked the interbank lending rate by 25 basis points off the effective zero lower bound. (6 comments)

Earnings worries

Signs are emerging that Q1 earnings season will be more disappointing than expected, especially with regards to forward estimates and guidance, Morgan Stanley says.

"Earnings revisions breadth for the S&P 500 has resumed its downtrend over the past 2 weeks and is once again approaching negative territory (which would mean more downward than upward out-year EPS revisions)," strategists wrote. (66 comments)

Private equity eyes Twitter

Apollo Global (APO) is reportedly considering participating in a bid for Twitter (TWTR). Apollo is said to have had discussions about backing a potential deal for Twitter and could provide Elon Musk or another PE bidder with equity or debt for a bid, according to a Wall Street Journal report.

CNBC reporter Leslie Picker confirmed the possible Apollo participation, though said it would only be in a financing capacity. Twitter is expected to officially reject Musk's $54.20/share offer in the coming days, the WSJ also reported. The social media platform is scheduled to report its earnings April 28 and may lay out its response at that time. (24 comments)

Apple wages

Some Apple (AAPL) retail workers in New York state are looking to organize and those organizers are reportedly looking for their wages to be boosted to at least $30 per hour, CNBC reported.

The news outlet, citing changes from the website of the group known as Fruit Stand Workers United, also reported that the organizers have several other demands, including increased tuition reimbursement, more vacation time, more retirement options and higher 401(k) matches, among others. (182 comments)

Judge nixes mask mandate

A federal judge in Florida voided the Biden administration’s national mask mandate applicable for planes and other forms of public transportation, arguing that the health officials had exceeded their authority.

In her ruling, U.S. District Judge Kathryn Kimball Mizelle said that the Centers for Disease Control and Prevention (CDC) had not adequately explained its decision and violated the procedures for proper rulemaking about the mandate. (118 comments)

Today's Markets

In Asia, Japan +0.56%. Hong Kong -2.28%. China -0.05%. India +0.08%.
In Europe, at midday, London -0.52%. Paris -1.18%. Frankfurt -0.96%.
Futures at 6:20, Dow -0.15%. S&P -0.25%. Nasdaq -0.46%. Crude -1.96% to $105.53. Gold -0.35% to $1979.70. Bitcoin +4.4% to $40,697.
Ten-year Treasury Yield +3.1 bps to 2.893%

Today's Economic Calendar

8:30 Housing Starts and Permits
12:05 PM Fed's Evans Speech

Companies reporting earnings today »

What else is happening...

Netflix (NFLX) Q1 preview: Focus on subscriber growth amid Russia ban.

NFL Sunday Ticket package may already be headed Apple's (AAPL) way.

Shell (SHEL) takes top spot in BloombergNEF green rating of oil and gas majors.

Peloton (PTON) loses speed amid price target trimming.

Barclays (BCS) gets rid of bullish Treasury bet as yields keep rising.

U.S.-made steel must be used in infrastructure bill projects, Biden says.

Activist questions Hasbro (HAS) management ahead of earnings.

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