SVET Reports

SVET Markets Weekly Update (August 15, 2022)

The second week of August (as of every other month) brings notable macroeconomic updates on the state of the US housing market in July, including: Housing starts and Building Permits, both to be issued at Tuesday, August 16, 08:30 AM as well as Existing Home sales, scheduled for Thursday, August 18 at 10:00 AM. Also, the New Home Sales report will be brought to our attention by the U.S. Census Bureau on the following week (Tuesday, August 23 at 10.00 AM).

US housing market is currently pulled into two opposite directions by two forces — the growing mortgage rate, which closely correlates with the US treasury notes price, and the US workforce leaving their residential city apartments to move into suburbs (as well as to other cheaper locations outside of costly metropolitan areas), as a remote work becomes a default option for almost all categories of corporate employees.

Basically, as the number of peoples willing to get into their new country houses grows because of the new, technologies-enhanced work environment, at the same time, fewer and fewer among them can afford that, ‘thanks’ to the medieval, centralized financial system they all stubbornly continue to vote for.

Here is how it works:

FOMC hiking federal funds rate (the overnight rate that banks use to lend to one another) rises the prime rate, or the interest rate that banks charge their most trustworthy (‘wealthiest’) customers. Naturally, it mostly hurts the low-income groups of US population — mortgages holders — which are now charged higher than the prime rate on their home loans by their banks.

Additionally, as part of its ‘anti-inflationary policy’, FED actively sells US gov debt papers or, as they called, ‘Treasuries’:

Quoting FOMC statement as of July 27 2022: The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2–1/4 to 2–1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities … EQ:

Treasury yields are inversely related to Treasury prices. So, when FED starts to sell T-bills, notes and bonds in an attempt to reduce M2 (to curb the inflation) its prices are falling and yields are climbing making securitized mortgages less attractive to institutional investors. Accordingly, this lessen mortgage securities prices and increases their yields urging mortgage debt issuers (banks) to rise the annual rate for home owners.

Of the total US population — 331,449,281 according to 2020 Decennial Census — there are about 122 million households (122,354,219 to be exact) — defined as ‘Group of one or more people living in the same dwelling and sharing meals or living accommodation’ owning 140.5 million housing units (140,498,736 according to the same census), which aggregate to more than USD 16 trillion (16.15) of debts (according to the Household Debt and Credit Report issued by the Federal Reserve Bank of NY in August 2022) averaging to USD 135.3 thousands of debt per one US household. Of that the total mortgages debt amount stands at USD 11.4 trillion — the largest component of the household debt (up more than USD 200 bln from Q1 2022), with another big component being student loans, which now reaches to $1.6 trillion.

At the same time, the yearly Median Household Income in USA does not exceed USD 65 thousand (64,994). Moreover, the average, so-called, ‘personal’ saving rate dropped to 5.1 percent in June (from 5.5 in May). So, if a ‘typical USA household’ (family) decides now to pay its debt from saving it takes more than 40 years to do that.

This even get worser as (according to Bankratecom) the average rate for the most popular, 30-year fixed mortgage gets almost to six (6) percent in August. It means that an US family has to take out almost 9% (400 USD) out of its USD 5.4k monthly budget only to cover their mortgage debt percentages. No wonder that FED and associated with its wall-street bankers types rise such a hate with its policies and their arrogant attitudes among the US population.

Now, let us get back to the US economy statistics reports which we’ll see this week.

In June US Housing starts declined 2% (in monthly terms) to 1.559 million units (the lowest since September 2021). Obviously, soaring home prices and mortgage rates hike are to blame for that dynamic. With that single-family housing suffered 8.1 percent drop (to 982,000) while price rise is expected to drastically reduce a sale of this types of dwellings in the South (-4.8% to 825,000) and the Midwest (-7.7% to 215,000) where population is reluctant (or simply can’t afford) to move from their old lodgings.

In a contrast the Northeast (10.6% to 156,000) and the West (3.7% to 363,000) saw the increase in housing starts, propelled by ‘office plankton’ switching to remote and moving out of big cities. Most analytics expect this June tendency to hold the following month, which (according to prognosis) leads to 1.57 million new unites started in in July.

In a parallel, the situation with June’s existing home sales is not improving too. The figure dropped 5.4 percent (to 5.12 million homes) reaching a new low since June of 2020. It means that sales declined fifth months in a row for, basically, the same reasons as for a new homes sales drop — prices for homes, propelled by the galloping inflation, are getting too high, while households incomes undercut by FED rates are sinking lower and lower.

Progressively, lesser number of peoples in US can afford to take on more debts to pay $416,000 (on average, up 13.4% from June 2021) for a house. As a result whet they call ‘the total housing inventory’ increased 9.6% from May to 1,260,000 units. Among that single-family home sales dropped 4.8% to 4.57 million. Accordingly, the prognosis for July’s for existing home sales given by most analytics is a pessimistic one, standing at 4.88 million homes.

Now to a retail sales statistics which looks much better than that showed by the US real estate industry.

US Retail sales are up 1 percent in June (monthly base), recovering from a 0.1% drop in May. With that we shall not forget that retail sales are not adjusted for inflation. US population, trapped by the ‘consumption orientated civilizational paradigm’, can cut their everyday consumption to only a certain level.

For the July report (issued at Tuesday, August 16) the majority of analytics predicate a drastic drop of sales to 0.1% (from 1% growth in a previous month). Apparently, they can’t wait when FED war against markets brings its first results in a form of lower sales, closing businesses, rising unemployment and lesser quality products.

QUOTE (Advanced Monthly Sales for Retail and Food Services Report for June, published by the U.S. Census Bureau July 15, 2022): Advance estimates of U.S. retail and food services sales for June 2022 … were $680.6 billion, an increase of 1.0 percent (±0.5 percent) from the previous month, and 8.4 percent (±0.7 percent) above June 2021. Total sales for the April 2022 through June 2022 period were up 8.1 percent (±0.5 percent) from the same period a year ago. … Retail trade sales were up 1.0 percent (±0.4 percent) from May 2022, and up 7.7 percent (±0.7 percent) above last year. Gasoline stations were up 49.1 percent (±1.6 percent) from June 2021, while food services and drinking places were up 13.4 percent (±3.9 percent) from last year. EQ:

Consequently, we see most increases in a gasoline and food categories — two major industries affected by three macro factors caused by Boomers adherence to outdated ideologies, their technological ineptness and their brainless ‘politics’: the continuing enclosures, the senseless war in Europe and the FED archaic monetary policy.