Market Snapshot
briefing.com
| Dow | 35301.52 | +76.43 | (0.22%) | | Nasdaq | 14064.36 | +0.67 | (0.00%) | | SP 500 | 4546.55 | +10.41 | (0.23%) | | 10-yr Note | 0/32 | 3.85 |
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| | NYSE | Adv 1404 | Dec 1467 | Vol 915 mln | | Nasdaq | Adv 1992 | Dec 2363 | Vol 5.4 bln |
Industry Watch
| Strong: Utilities, Energy, Health Care, Real Estate, Consumer Staples, Real Estate |
| | Weak: Materials, Communication Services, Information Technology, Industrials, Financials |
Moving the Market
-- Broader market building up strength as money rotates out of mega caps
-- Above-average volume due to options expiration day and Nasdaq 100 special rebalance, which goes into effect before Monday's open
-- Rebound action in semiconductor stocks
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Closing Summary
21-Jul-23 16:30 ET
Dow +2.51 at 35227.60, Nasdaq -30.50 at 14033.19, S&P +1.47 at 4537.61
[BRIEFING.COM] The stock market closed out another mixed session. There wasn't any concerted selling interest, but there wasn't a lot of buying interest either as market participants looked ahead to a busy earnings reporting schedule next week that will feature results from Alphabet (GOOG 120.31, +0.78, +0.7%) and Microsoft (MSFT 343.77, -3.10, -0.9%) on Tuesday and Meta Platforms (META 294.26, -8.26, -2.7%) on Wednesday. Also, there will be policy meetings for the Fed, the ECB, and the Bank of Japan. The economic calendar, in turn, will feature a number of key releases highlighted by the Adv. Q2 GDP report and the June Personal Income and Spending Report that will include the Fed's preferred inflation gauge in the form of the core-PCE Price Index.
Still, the broader market held up well today in spite of some relative weakness in the mega cap space. The Vanguard Mega Cap Growth ETF (MGK) fell 0.2% while the Invesco S&P 500 Equal Weight ETF (RSP) eked out a 0.1% gain. The market-cap weighted S&P 500 closed flat. The Dow Jones Industrial Average finished just above the unchanged mark, which was good enough for its tenth consecutive gain.
Today's price action featured a broadening out of buying interest that led to non-tech and value stocks outperforming. The Russell 3000 Value Index rose 0.2% while the Russell 3000 Growth Index fell 0.2%.
Semiconductor stocks were another pocket of strength, bouncing back from losses yesterday. The PHLX Semiconductor Index rose 1.0%.
Dow component American Express (AXP 170.22, -6.89, -3.9%), on the other hand, was a notable laggard, registering a decent loss following its earnings report, which featured lower than expected revenues and a notable increase in the provision for credit losses.
Roughly half of the S&P 500 sectors closed with a gain led by utilities (+1.5%), health care (+1.0%), and energy (+0.8%). The communication services (-0.5%) and industrials (-0.5%) sectors resided at the bottom of the pack along with the financials (-0.3%) and information technology (-0.3%) sectors.
Market breadth also reflected mixed action. Advancers were roughly in line with decliners at the NYSE while decliners had an 11-to-10 lead over advancers at the Nasdaq.
As a reminder, the Nasdaq 100 special rebalance goes into effect before Monday's open.
- Nasdaq Composite: +34.1% YTD
- S&P 500: +18.2% YTD
- Russell 2000: +11.3% YTD
- S&P Midcap 400: +11.3% YTD
- Dow Jones Industrial Average: +6.3% YTD
As a reminder, the Nasdaq 100 special rebalance goes into effect before Monday's open.
There was no U.S. economic data of note today.
Looking ahead to Monday, market participants will receive the following economic data:
- 9:45 a.m. ET: July S&P Global US Manufacturing PMI - Prelim (prior 46.3) and S&P Global US Services PMI (prior 54.4)
Treasuries settle little changed
21-Jul-23 15:30 ET
Dow +27.44 at 35252.53, Nasdaq -20.80 at 14042.89, S&P +5.43 at 4541.57
[BRIEFING.COM] The major indices took a noticeably turn lower recently. The S&P 500 and Nasdaq are testing session lows.
Treasuries settled the session little changed from yesterday. The 2-yr note yield rose one basis point to 4.85% and the 10-yr note yield was unchanged at 3.85%.
Looking ahead to Monday, market participants will receive the following economic data:
- 9:45 a.m. ET: July S&P Global US Manufacturing PMI - Prelim (prior 46.3) and S&P Global US Services PMI (prior 54.4)
Energy complex settles mixed; energy sector outperforms
21-Jul-23 15:00 ET
Dow +76.43 at 35301.52, Nasdaq +0.67 at 14064.36, S&P +10.41 at 4546.55
[BRIEFING.COM] The major indices turned slightly lower, but still remain in narrow trading ranges.
Energy complex futures settled the session mixed. WTI crude oil futures rose 1.9% to $77.05/bbl while natural gas futures fell 0.7% to $2.71/mmbtu.
On a related note, the S&P 500 energy sector (+0.8%) trades near the top of the leaderboard. SLB (SLB 56.30, -0.97, -1.7%) is the worst performer from the sector after reporting below-consensus Q2 revenue.
Zoetis, Danaher benefiting from broader healthcare gains
21-Jul-23 14:25 ET
Dow +70.03 at 35295.12, Nasdaq +14.86 at 14078.55, S&P +12.93 at 4549.07
[BRIEFING.COM] The S&P 500 (+0.29%) is still atop the major averages, through the trio has altogether slipped a bit over the past half hour.
S&P 500 constituents Zoetis (ZTS 184.11, +12.50, +7.28%), Etsy (ETSY 97.61, 4.54, +4.88%), and Danaher (DHR 256.80, +12.42, +5.08%) dot the top of the S&P. ZTS gains on favorable William Blair commentary, ETSY saw positive commentary from research and analysis firm YipitData, while DHR outperforms ahead of next week's earnings.
Meanwhile, North Carolina-based chemical manufacturer Albemarle (ALB 216.12, -6.99, -3.13%) is near the bottom of the standings, underperforming alongside lithium peers owing in part to recent reports of a less-than stellar showing of Chinese lithium futures on their introductory trading session.
Gold trims weekly gains on Friday
21-Jul-23 14:00 ET
Dow +105.66 at 35330.75, Nasdaq +57.45 at 14121.14, S&P +19.62 at 4555.76
[BRIEFING.COM] With about two hours to go on the week the tech-heavy Nasdaq Composite (+0.41%) has climbed into second place with the advance in the DJIA (+0.30%) slowing near HoDs.
Gold futures settled $4.30 lower (-0.2%) to $1,966.60/oz, ending the week about +0.1% higher, rebounding nicely from Monday's weekly lows of about -0.7%.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $101.04.
Page One
Last Updated: 21-Jul-23 08:50 ET | Archive
Following rules of stock market physics
The Nasdaq Composite declined 2.0% on Thursday with losses in Tesla (TSLA), Netflix (NFLX), and semiconductor stocks weighing heavily. Based on this year's rules of stock market physics, however, what goes down must go up. Sure enough, those stocks and others are making a rebound effort that has the Nasdaq 100 futures in better shape this morning.
Currently, the S&P 500 futures are up 19 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 99 points and are trading 0.7% above fair value, and the Dow Jones Industrial Average futures are up 62 points and are trading 0.2% above fair value.
There isn't much more to it other than a Pavlovian, buy-the-dip response knowing that the news flow hasn't possessed a catalytic pop. What will be watched closely today is whether that response holds up as the day progresses or if it is stifled by a renewed bid to take some money off the table.
Much of the news flow has been earnings related. Dow component American Express (AXP) is the headliner on that front. It topped the Q2 consensus EPS estimate, but its revenues were light of expectations and it logged a notable increase in its provision for credit losses that is being blamed for its weakness.
AXP is down 4.1% in pre-market trading. That is having some impact on the Dow Jones Industrial Average futures, but in general, it isn't having much impact on the broader market, which is keying off the rebound action in stocks like Tesla, Netflix, Microsoft (MSFT), Apple (AAPL), and NVIDIA (NVDA).
Similarly, railroad operator CSX Corp. (CSX) is down 3.2% after posting some lackluster Q2 numbers, but, again, the broader market is orienting itself toward the price action of its heavyweight leaders.
There isn't any U.S. economic data of note today, so the stock market won't be getting a push one way or the other from the economic calendar. Treasuries, in turn, might be searching for a trading catalyst.
The 2-yr note yield is down one basis point to 4.83% and the 10-yr note yield is down three basis points to 3.82%, perhaps keying a bit off an interest-rate differential trade following a Bloomberg report that indicates Bank of Japan officials don't see an urgent need at this point to address the yield curve control policy.
That report has tamped down speculation of a shift at next week's BOJ policy meeting, which is evident in the yen's weakness today. Currently, the dollar is up 0.9% against the yen to 141.38 after being up as much as 1.3% earlier.
As a reminder, the Nasdaq 100 special rebalance will be effective before the open on Monday.
-- Patrick J. O'Hare, Briefing.com
American Express gets declined after missing on revenue and refraining from lifting guidance (AXP)
Despite achieving record highs in both revenue and EPS for Q2, credit card company American Express (AXP) is getting declined by investors today. After back-to-back earnings misses in Q1 and Q4, the company exceeded bottom-line expectations this quarter as it reined in expenses, but the EPS beat is being overshadowed by a slowdown in consumer spending that resulted in a revenue miss. Adding to investors' angst, AXP only reaffirmed its FY23 EPS guidance of $11.00-$11.40 even after surpassing Q2 earnings estimates.
- Business was still healthy for AXP as total network volume increased by 8% to $426.6 bln. The issue, though, is that the growth represents a material slowdown from last quarter when total network volume climbed by 14%.
- To be fair, AXP lapped a difficult yr/yr comparison in Q2 with total network volume jumping by over 30% in the year-earlier period.
- Still, the deceleration, combined with an increase in AXP's provision for credit losses to $1.2 bln from $1.1 bln in Q1, is painting a more muted picture for both the economy and for AXP's business.
- On the positive side, a more affluent customer base has made AXP more resilient to the effects of rising interest rates and inflation. Spending on travel and entertainment (T&E), especially for these higher-income consumers, has remained a priority as reflected in another double-digit increase in T&E spending (+14%) across AXP's network.
- The outlook here continues to be very bright, highlighted by a string of beat-and-raise earnings reports across the airline industry over the past week.
- The robust demand environment for travel, which is being driven by an ongoing shift in spending towards experiences, should also provide a boost for Visa (V) and Mastercard (MA) when those companies report earnings on July 25 and July 27, respectively.
- However, we do worry that slowing consumer spending may impact those companies more than AXP since they don't necessarily benefit from a customer base that has more disposable income.
- Like many consumers, AXP took a more cautious approach with spending in Q2. Following a 22% increase in Q1, expenses were up by a more modest 7% in Q2. The downside of this pullback in spending is that the company's revenue growth is also directly affected.
- With AXP cutting back on marketing-related investments, its top-line growth slowed to 12.4% -- its lowest growth rate in more than two years.
Overall, AXP delivered solid results considering the difficult macroeconomic environment, but its reluctance to raise its FY23 guidance and the slowdown in total network volume growth point to softer business conditions.
PPG Industries losing some of its shine as industrial production levels expected to remain low (PPG)
PPG Industries (PPG) is losing momentum today after being up as much as +2% following a double-digit earnings beat and decent revenue upside in Q2. The coatings and specialty materials maker also provided Q3 and FY23 guidance that met analyst expectations. After shares climbed around 14% from May 31 lows, which followed PPG's long-term financial targets, investors may be taking risk off the table, particularly after management noted that the macroeconomic climate will likely remain the same through Q3. That is, continued lower industrial production levels in Europe and the U.S., with only a modest sequential improvement in China.
CEO Timothy Knavish cautioned that global industrial production is muted, underpinning restrained buying behavior in Europe and the U.S., as well as a slower-than-expected recovery in China. Several industrial end-use markets are currently amid recessionary demand conditions. This was evident by PPG's elevated raw material inventories, which it plans to tackle over the next few quarters.
- Nevertheless, against this backdrop, PPG registered a solid quarter. Revs edged 3.9% higher yr/yr to $4.87 bln, an acceleration from the +1.7% delivered last quarter and (0.1)% in 4Q22. Record sales were achieved in five of PPG's nine businesses, including aerospace, automotive, and PPG Comex, its architectural coatings business in Mexico.
- Meanwhile, adjusted EPS expanded by over 24% yr/yr to $2.25, reflecting healthy progress toward margin recovery, which has been PPG's near-term priority. Aggregate segment margins in Q2 were approximately 16%, a 330 bp improvement from the year-ago period. PPG's largest segment, Performance Coatings (~62% of Q2 sales), recorded margins near 18%, the highest level since 2016. Management expects selling prices to remain favorable during 2H23, providing a sustained boost to margins for the year.
- Looking ahead, PPG projected Q3 and FY23 adjusted EPS of $1.85-1.95 and $7.28-7.48, the latter representing over 20% yr/yr growth at the midpoint. Although management warned of lingering macroeconomic hiccups, they were bullish on many business areas.
- For example, PPG anticipates demand for aerospace and auto OEM products to remain robust throughout the year as international flights remain down 10% from pre-pandemic levels and lower automotive OEM builds have caused a significant supply deficit.
- Additionally, after steadily delivering strong earnings performance in Europe despite lackluster regional industrial production, PPG is confident it will be well-positioned for robust top and bottom-line growth once this area rebounds.
- Also, in Mexico, PPG continues to fire on all cylinders, capitalizing on favorable economic conditions and does not expect this to dissipate soon.
PPG's Q2 results added further evidence of slowing production across the globe. For instance, Fastenal (FAST) mentioned slowing domestic industrial production causing lighter-than-expected transactions earlier this month. Furthermore, NCAB Group, a printed circuit board supplier, commented that China's product consumption is lower, causing ripple effects on industrial production.
On a final note, it is worth keeping an eye on peers Sherwin-Williams (SHW), RPM (RPM), and Axalta (AXTA), which report earnings over the next two weeks. Keep in mind SHW and RPM have relatively low overseas exposure, while AXTA derives nearly 60% of sales from outside the U.S.
AutoNation heads lower following Q2 earnings; demand strong but new car margins moderating (AN)
AutoNation (AN -8%) is trading lower despite reporting strong upside Q2 results this morning. AutoNation is one of the largest car dealership in the US, spanning multiple brands with locations predominantly in major metropolitan markets in the Sunbelt region.
- AutoNation has reported its third consecutive large EPS beat. It also bounced back with nice revenue upside following a top line miss in Q1. AN concedes the economy has been mixed and higher rates are impacting affordability. However, the supply/demand equation has remained favorable for the business. Also, lower unit sales over the past few years has contributed to pent-up demand. AN cites another positive, namely an aging vehicle fleet, which is now about 12.5 years.
- AN says that consumer demand for vehicle ownership remains strong and AN is benefitting from that trend. New vehicle unit sales rose 8% yr/yr to 62,444. The increase in volume partially offset lower new vehicle PVR margins, which, although moderating, still remain healthy at $4,600. Used vehicle sales dropped 11% yr/yr to 68,812. Also, while revenue per new vehicle retailed rose 3.6% to $52,543, that metric fell 7.5% for used vehicles to $28,326.
- The company says that front-end margins have been more resilient than most were expecting heading into the year. However, AN expects margins will continue to moderate in this higher monthly payment environment and partly as inventory levels continue to increase and fewer vehicles are being sold at MSRP. The company does not expect margins to return to pre-pandemic levels for the foreseeable future based on higher average selling prices and continued low industry inventory levels.
- On the used side of the equation, AN believes that lower new unit sales over the past years led to scarcity of supply of late model used vehicles and this trend is continuing. Consumers are clearly holding on to their vehicles for longer. AutoNation spent a lot of effort in Q2 to regrow its inventory to get it ready for Q3 and beyond. AN exited Q2 with increased availability, which should enable it to drive unit sales.
Despite the strong upside, the share price is falling today. We think investors are focusing on the lower new vehicle PVR margins. Also, there was a pretty sizeable decline in used car unit sales even as average revenue declined. Another issue is that the stock had run from $130 in late May to $182 by mid-July, so we think sentiment was running pretty high heading into this report. As such, investors are using any perceived weakness as a reason to lock in profits.
Despite the stock reaction today, we plan to keep AN on the radar as we think it will benefit from macro trends, including people spreading out and moving into bigger homes after the pandemic. Also, its focus on the Sunbelt region is attractive given the migration trends in the US. On a final note, AN has been good about buying back shares. In Q2, it repurchased 1.6 mln shares worth $207 mln although that is down a bit from 2.4 mln shares repurchased worth $305 mln in Q1.
CSX gets railroaded by softening intermodal business, leading to rare top-line miss (CSX)
Railroad company CSX (CSX) was rolling higher heading into its 2Q23 earnings report, but that momentum has been derailed by a top line miss and the end of a winning streak against EPS estimates that spans over five years. Amid a challenging macro environment, the company executed well during the quarter, as reflected by its operating ratio improving to 59.9% from 60.5% in Q1. However, CSX faced an uphill climb in Q2 as a host of headwinds put the brakes on its growth.
- The intermodal business in particular continues to stand out as an area of weakness. Discouragingly, intermodal is going in reverse with revenue declining by 18% yr/yr following a drop of 5% in the prior quarter.
- Similar to Q1, high retail inventory levels and an associated decline in imports negatively impacted international shipments. While domestic shipments also decreased due to a softening trucking market, CSX is at least seeing signs of improvement there.
- Unfortunately, the same can't be said for international as CSX acknowledged that it's seeing no signs of a near-term recovery.
- Lower diesel prices also pressured CSX's revenue. CSX and other railroad operators charge a fuel surcharge to recover the cost of fuel when they transport goods. When diesel prices are higher, the margin between the fuel surcharge and cost of fuel typically expands, creating an additional source of revenue for railroad companies.
- In the year-earlier period, a higher fuel surcharge helped drive a 10% increase in merchandise revenue.
- Compounding the problem, coal experienced a significant downturn from last quarter as lower export benchmarks led to a 2% decrease in revenue, despite a 4% volume gain. In Q1, coal was a source of strength with revenue jumping by 19%, fueled by healthy export volumes on strong utility restocking demand and higher commodity prices. Coal prices are impacted by natural gas prices, which have plummeted over the past year.
It's not all bad news for CSX.
- Automotive remained a bright spot with revenue increasing by 21%, bolstered by more consistent production from manufacturers amid an improving supply chain situation. Additionally, the metals (+11%) and minerals (+12%) markets benefitted from strong construction demand.
- Overall, total merchandise revenue was up by 5% yr/yr, which CSX was satisfied with given the difficult climate. From a broader perspective, CSX and peers such as Union Pacific (UNP) and Norfolk Southern (NSC) -- which are slated to report earnings on July 26 and July 27, respectively -- are benefitting from a shift from trucking to rail.
- In the wake of the pandemic, manufacturers are looking to make their supply chains more cost effective and efficient, making rail a more attractive option.
The main takeaway is that CSX is performing well in terms of factors that are under its control, but business conditions remain mixed with weakness in intermodal continuing to weigh on its results.
Intuitive Surgical's upbeat Q2 results do not cut it as investors are left wanting more (ISRG)
Intuitive Surgical's (ISRG -1%) Q2 earnings and sales upside is not cutting it today. The robotic surgical systems manufacturer also increased its FY23 procedure growth guidance to +20-22% yr/yr, a nice bump from +18-21%, which was already a considerable jump from the company's initial +12-16% forecast.
So why is the market displeased? With China amid recovery and an uptick in deferred care triggering more frequent surgical procedures domestically, a trend discussed by UnitedHealth Group (UNH) and peers Johnson & Johnson (JNJ) and Abbott Labs (ABT) recently, investors may have anticipated a bigger raise to FY23 procedure growth targets. Additionally, bariatric growth, a significant business for ISRG, was lower in Q2 than in prior periods, reflecting a demand shift toward weight-loss drugs. Although these are minor blemishes, shares rallied over +18% since gapping +11% higher on upbeat Q1 results in mid-April, making ISRG's Q2 numbers susceptible to nitpicking.
- ISRG still registered healthy figures in Q2, improving its top line by 15.4% yr/yr to $1.76 bln, helping drive a wider earnings beat than in the previous quarter. Worldwide da Vinci procedures expanded by approximately 22% yr/yr despite minor setbacks, such as lingering COVID-19 cases, higher hospitalization rates, and government interventions primarily occurring in China.
- The install base of da Vinci systems, a key metric, jumped 13% yr/yr in the quarter to 8,042, coming up a tad short of street estimates. Management noted that it is seeing fewer pockets of supply chain-related challenges but is still experiencing some disruptions.
- AI was a topic of discussion, albeit brief. Replying to a question, CEO Gary Guthart commented that AI is only as good as the data that goes into it. ISRG has been actively exploring AI technology for several years, mentioning that it takes time to validate systems but will continue down its current pathway.
- Looking ahead, ISRG remained somewhat conservative, underscored by its relatively slim increase in its procedure growth outlook for the year. The company noted that the low end of its +20-22% prediction incorporated uncertainty surrounding the duration of elevated procedure volumes sparked by patients returning to health care, as well as slowing bariatric growth rates in the U.S. and general macroeconomic hurdles.
Overall, ISRG delivered good results in Q2, showcasing favorable trends in the U.S. and abroad. However, investors were left wanting more after peers' recent comments regarding pent-up demand and healthy surgical procedure volumes. Also, the shift toward weight-loss drugs is a concern, especially over the near term, as patients become more educated on the benefits of these drugs. However, the non-surgical route still carries side effect risks, which can become more of a hindering factor over time. On that topic, management was confident that over the long term, there would remain a role for surgery in weight loss.
Bottom line, today's pullback is healthy given the incredible run shares have been on since Q1 results in April. Even though uncertainties linger, we would not discount ISRG's growth prospects over the long run.
The Big Picture
Last Updated: 21-Jul-23 15:46 ET | Archive
Existing home market between a rock and a hard place
Existing home sales in June were down 18.9% year-over-year at a seasonally adjusted annual rate of 4.16 million. It was another disappointing report on the surface; however, the weak year-over-year sales wasn't a case of weak demand so much as it was a case of weak supply.
That has been the case for some time now -- and we don't just mean over the last year or so when the Fed has been raising interest rates.
In a more balanced market, there is typically 4-6 months' supply of existing homes for sale based on the prevailing sales rate. The last time we saw 6.0 months of available supply in the existing home market was August 2012. Since that time, the supply of existing homes for sale has averaged just 3.9 months, and over the last five years, it has averaged only 3.1 months. In January 2022 it reached an all-time low of 1.6 months.
There is low supply but there is not low demand. In textbook fashion, then, sales prices have increased and they seem poised to keep rising.
Supply Constraints
The median sales price in June for all housing types was $410,200. That was the second-highest level since records began in 1999. The highest level was seen in the same period a year ago.
It is remarkable that prices have held up as well as they have given the spike in mortgage rates that has coincided with the Fed's rate hikes and quantitative tightening.
Then again, it is a matter of supply and demand, and demand hasn't dropped off because the labor market hasn't dropped off to this point despite the Fed's rate hikes. The 3.6% unemployment rate in June remained near a 50-year low.
There are various reasons why the supply of existing homes for sale is so low:
- Gainfully employed homeowners and retirees, who took out mortgages or refinanced mortgages at much lower rates in recent years, don't want to sell their home and face a higher cost of ownership that comes with today's higher mortgage rates and high-priced homes.
- The newfound ability to work remotely has curtailed the need to move from favored locations when an employee takes a new job, so there is less turnover now in the housing market than in pre-pandemic years past.
- Investment companies (and individual investors) scooped up a lot of available homes for sale during the Great Recession and onward, turning them into rental properties.
- New construction has been constrained by the higher financing costs, higher land costs, permitting restrictions, and difficulties in finding (and keeping) labor to build the homes. In June, single-family starts were down 7.4% year-over-year and permits to build single-family homes were down 2.7% year-over-year.
Then and Now
The jump in mortgage rates, admittedly, has cooled off the rapid home price appreciation seen in the midst of, and in the wake of, the COVID pandemic. We are inclined to think, too, that some prospective buyers were scared away by the idea of buying into the market at a "top," cognizant of the material losses incurred by many homeowners needing to sell during the housing crisis or soon thereafter.
One of the key differences between then and now, however, is that homeowners then were also dealing with rising levels of unemployment. That pressure has not pervaded the existing home market in this cycle -- not yet anyway, and it may not, but it is a key difference that helps explain why supply is low and selling prices remain high.
Affordability Not What It Used to Be
Stubbornly high prices combined with a spike in mortgage rates have created some increased affordability pressures that have not been seen for some time. The NAR's Housing Affordability Index stood at 93.8 in May. An index above 100 means a family earning the median income has more than enough income to qualify for a mortgage loan on a median priced home with a 20% down payment.
This connection between mortgage rates and affordability is why prospective buyers -- and existing homeowners wanting to move -- are anxious to see a drop in mortgage rates. That would relieve some of the affordability pressures, but it won't eliminate them if the labor market is still running strong.
The reason being is that there is undoubtedly pent-up demand, and if/when mortgage rates come down, that will unleash the pent-up demand that will be competing for what is still a relatively scarce supply of existing homes for sale. Accordingly, look for median selling prices to remain stubbornly high.
What It All Means
It may not be as much of a seller's market in the housing market as it was a few years ago, but that doesn't mean it is entirely a buyer's market either. The existing home market is between a rock and a hard place, pressured by tight supply and rising -- or maybe we should say a normalization in -- mortgage rates.
The speed with which mortgage rates rose was a halting factor for existing home sales and price appreciation, but for some perspective, they remain well below mortgage rates that stretched into the mid to high teens back in the early 1980s. Granted they are higher than the average of 5.6% for the last 30 years, but if the Fed succeeds in slaying inflation, they will moderate and prospective buyers will respond accordingly.
Existing homeowners then are in a reasonably good spot even if it is not the exact spot they want to be in physically. The inference is that ongoing demand encouraged by a strong labor market should keep median prices rising and padding their home equity.
The latter will remain a support for consumer spending via the wealth effect.
If there is a risk to the existing home market and pricing there, it would be another spike in mortgage rates or a crack in the labor market that translates into a significant rise in the unemployment rate. Conversely, some relief on mortgage rates and/or continued strength in the labor market will be good for sellers who want to sell and buyers who want to buy, albeit at higher prices.
-- Patrick J. O'Hare, Briefing.com
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