Morning Report – New Home Sales and China’s property bubble 7/24/14

Markets are higher this morning on decent earnings. Bonds and MBS are down.

Initial Jobless Claims came in at 284k, the lowest print since 2006. Consumer Comfort inched up in last week.

Remember that blockbuster new home sales number last month? 504,000 units? Revised down to 442k. June new home sales came in at 406k. I remember looking at the strong May number and trying to reconcile it with the weak numbers out of KB Home and Lennar, which were announcing earnings at the time. Turns out the new home sales number was bad. You can see how depressed new home sales are from peak levels almost 10 years ago.

New home sales bbg

D.R. Horton reported earnings this morning, as orders increased 32% in value and 25% in units. The cancellation rate was 24%, though. Interestingly, gross margins fell, which is the first we have seen. The builders have been able to increase prices faster than input costs have gone up. That said, there were some special items in that number so the year-over-year decrease could be misleading. The stock is down this morning.

PulteGroup also announced numbers this morning. Average selling prices rose 12% to $328,000, and gross margins came in at 23.6%, up 480 basis points year over year. Closings dropped 9% in units, however, so Pulte looks to be following the typical builder pattern of higher prices / lower units. PHM is down this morning.

China is in the midst of a skyscraper-building craze. This sort of thing is reminiscent of the 1920s, where the Chrysler Building and 40 Wall Street were neck and neck to build the tallest skyscraper. The Chrysler building won out by constructing the spire inside the building and then pushing it through the top at the very last minute. However their position as tallest was eclipsed by the Empire State Building in the years following. As a general rule, tallest skyscrapers tend to be associated with market tops. Think Chrysler and the Empire State Building prior to the Depression, the Petronas Towers in Kuala Lumpur ushered in the Asian Crisis. China has been going through a period like the US did in the subsequent WWI era – rapid growth and urbanization. They will probably have to go through a gut-wrenching bust like the Depression as well.

Note that China is the biggest international player in the US residential market, and is pushing up prices in Los Angeles, San Francisco, San Diego, New York, and Seattle as professional investors buy up properties sight unseen. Once the Chinese bubble bursts and things start getting ugly, look for these same investors to begin unloading properties in these cities. Remember in a crisis, you sell what you can, not necessarily what you want to.

13 Responses

  1. Frist.


  2. Ross Douthat’s take on Ryan’s proposals is worth a read. This is an interesting observation:

    “But there’s one more factor here, which is that any truly big new liberal idea, from an expansion of Social Security to a guaranteed income, will force Democrats to confront the question of when and whether they intend to actually call for the middle-class tax increases — or at least the upper-upper middle class tax increases! — that are ultimately required to pay for the welfare state that they desire. I don’t see a lot of appetite for that kind of bullet-biting on the center-left right now, whereas on the Republican side there’s a much greater willingness, post-2010, to bite the alternative bullet of entitlement reform. And that matters: The emerging policy vision on the right only coheres and makes (at least some) fiscal sense because it includes proposals to change Medicare and (from leading politicians like Ryan and Marco Rubio, if not from the party as a whole) Social Security as well. A center-left analogue would need to come to grips more fully with the long-term cost of the liberal vision, and the need, eventually at least, for new taxes on someone other than the rich.”


  3. I have said it before: The baby boom generation is the richest generation by far. Gen-Xers and Millennials are way behind them. I think it is going to be a very tough sell for Baby Boomers to get the tax hikes they would require to sustain SS and Medicare. It will be an epic generational war.


  4. ” It will be an epic generational war.”

    let’s do this thing.


  5. from the Amazon page: “, both natural and human, almost certainly all happen for one fundamental reason. More than that, there is not and never will be any way to predict them”.

    so it’s an inspirational read.


    • nova:

      so it’s an inspirational read.

      So far I’ve only read about earthquakes, forest fires, and extinctions. Haven’t gotten yet to the real inspirational stuff of financial collapses and wars.


    • McWing:


      O-care has been the product of cynicism, disingenuousness, and lies from the very beginning. The marketers of this abomination are shameless snake oil salesmen preying on the ignorant.

      Kimberly Strassel at the WSJ has an interesting column today.

      We know that in the late summer of 2010, after ObamaCare was signed into law, the IRS assembled a working group—made up of career IRS and Treasury employees—to develop regulations around ObamaCare subsidies. And we know that this working group initially decided to follow the text of the law. An early draft of its rule about subsidies explained that they were for “Exchanges established by the State.”

      Yet in March 2011, Emily McMahon, the acting assistant secretary for tax policy at the Treasury Department (a political hire), saw a news article that noted a growing legal focus on the meaning of that text. She forwarded it to the working group, which in turn decided to elevate the issue—according to Congress’s report—to “senior IRS and Treasury officials.” The office of the IRS chief counsel—one of two positions appointed by the president—drafted a memo telling the group that it should read the text to mean that everyone, in every exchange, got subsidies. At some point between March 10 and March 15, 2011, the reference to “Exchanges established by the State” disappeared from the draft rule.

      Emails viewed by congressional investigators nonetheless showed that Treasury and the IRS remained worried they were breaking the law. An email exchange between Treasury employees in the spring of 2011 expressed concern that they had no statutory authority to deem a federally run exchange the equivalent of a state-run exchange.

      Yet rather than engage in a basic legal analysis—a core duty of an agency charged with tax laws—the IRS instead set about obtaining cover for its predetermined political goal. A March 27, 2011, email has IRS employees asking HHS political hires to cover the tax agency’s backside by issuing its own rule deeming HHS-run exchanges to be state-run exchanges. HHS did so in July 2011. One month later the IRS rushed out its own rule—providing subsidies for all.

      It’s obvious that pretty much everyone, even the IRS, agrees to what the words in the law actually mean. One of the main claims of the admin and its supporters regarding the subsidy is that the reference to State-run exchanges was merely a “drafting error”. This in itself is an admission that the law as written means what the challengers say it means. It wouldn’t be an “error” if it could be reasonably interpreted to mean what they want it to mean. But if indeed it was merely a “drafting error” and not an intentional incentive to get states to create their own exchanges, then Congress can easily fix it by simply changing the law. What makes the fix difficult is the politics of the situation, which is not something the Court is suppose to take sides on.

      So basically there is no dispute over what the words as written mean. It isn’t an ambiguous wording with two possible meanings. The only question is whether or not congress intended what it actually said, or whether that specific language was an oversight, and it intended something else. And, on the back of that, whether the regulatory bureaucracy has the discretion to decide for itself that the words were a “drafting error”. But neither the court nor the regulatory bureaucracy needs to answer that question, since Congress can clarify itself by either writing new legislation “fixing” it or leaving it as it is. The only reason for any court to rule in favor of the IRS’s “discretion” to “fix” the law by interpreting it to mean something other than what it actually says is to avoid the poilitical difficulty in getting congress to clarify in favor of the admin’s desires. Therefore, any court that does so rule is, to me, plainly acting in a political, not legal, manner.

      Which is no surprise. The politicization of the judicial system is pretty much written into the DNA of liberal judicial philosophy.


      • Scott, I missed your 2 questions to me the other day – had just got back from Yosemite. The competing claims are that the statute specifically refers to subsidizing state exchanges BUT by necessary implication can include HHS created exchanges within a state, based on other sections of the statute. See pages 19 and 20 of the 4th Circuit opinion. The 4th treats that as a jump ball and in that case the IRS is permitted Chevron deference. I actually think that is the more standard result from precedent. If another IRS decides differently than the 4th would go along with that, too, once having ruled a “jump ball”. Statutory construction never limits us to one section of a bill.

        The other question you asked me and QB was about direct appeal. I can see the losers in the DC case appealing to the Circuit en banc and the losers in the 4th directly appealing to the Supremes. QB, as a procedural ploy, do you think the Supremes would bite? IDK. Might be too cute.


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