U.S. existing home sales rose more than expected in March to the highest annual rate in 18 months, according to the National Association of Realtors. After the publication, gold prices tumbled to the sharpest single session loss in more than six weeks. Do strong home sales in March signal that the economy is bouncing back?
Last month, existing home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.1 percent to an annualized rate of 5.19 million, more than the 5.03 million expected and 4.88 million in February. This report, together with March data on inflation (CPI), was interpreted by many analysts as an early sign of an economic rebound in the second quarter, which would warrant the Fed’s hike this year.
We cannot preclude such a scenario, however, economic data is generally not very optimistic so far and the sole jump in U.S. existing home sales is not able to change the general outlook, especially that some analysts doubt the housing market recovery. Just take a look at the chart below.
Figure 1: Existing home sales from 1999 to 2015.
From the long-term perspective, home sales volume has been in a secular downturn since 2006, but the bubble was never allowed to fully deflate due to different government interventions (such as the introduction of homebuyer tax credit between 2008 and 2010) or large purchases of foreclosed and distressed homes by big investment funds from Fannie Mae and Freddie Mac. This fact should not be neglected, as the unloading of their portfolios (total housing inventory at the end of March climbed 5.3 percent to 2.00 million existing homes available for sale, and is now 2.0 percent above the figure we saw one year ago) would cause a flood of available houses in the market.
When you add the falling homeownership rate in the U.S. (it dropped from 69.4 in Q2 2004 to 63.9 in Q4 2014) and the home price appreciation 13 times greater than the median wage growth between 2012 and 2014, the outlook for the housing market does not look as rosy as it is commonly believed. The Fed’s easy monetary policy caused rapid price appreciation, which in turn drove out many people from the housing market (indicated by the falling homeownership rate) and resulted in an accumulation of a record level of inventory by homebuilders.
To sum up, the recent data on March existing home sales (and CPI inflation) were rather positive and were interpreted as an early sign of an economic recovery in the second quarter, which would warrant the Fed’s hike this year. However, it is too early to trumpet a rebound, which is good news for the gold bugs. The Atlanta Fed’s GDPNow model forecast real GDP growth at 0.1 percent in Q1 2015, while investors expect (with a probability of more than 50 percent) the first Fed’s interest rate hike not earlier than in December 2015. We have to wait for more data, however it seems that investors exaggerated again a bit (as they did after the February job market report). When they realize this, it would be positive for gold prices.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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