Our call on the housing market bottoming in Q2 continues to play out. Now we must answer the question-what's next?
The first thing I thought of when I saw the pending home sales number was that the government has gone too far trying to stimulate the housing market.
The number of people signing contracts to buy previously owned homes climbed 6.7% in April, the fourth increase in five months and significantly more than consensus.
The National Association of Realtors said the index of signed purchase agreements was the biggest in more than seven years. Importantly, the April reading was up 3.2% year-on-year.
Significantly lower home prices, historically low interest rates and tax incentives are an aggressive stimulant to the housing market. This is good news and provides the supporting evidence to the 40% move in the S&P 500 since the March 9th low. Where do we go from here?
First, mortgage rates are not going any lower and have been climbing of late. Second, while confidence is off the lows, the unemployment rate is still climbing. Third, today's number contrasts sharply with the muted 0.3% rise in new home sales, which suggests deeply discounted used homes are providing stiff competition for the home builders.
The positive trends in the housing market are now being priced into the equity markets, however what has not being prices in is the next move from the FED - higher rates!