Morning Report: The US economy is off to a good start this year

Posted on January 24, 2024 by Brent Nyitray

Vital Statistics:

Stocks are higher this morning on good earnings numbers out of market darling Netflix. Bonds and MBS are up.

Mortgage applications rose 3.7% last week as purchases increased 8% and refinances fell 7%. There was an adjustment for the Martin Luther King holiday. “Mortgage rates increased slightly last week, but there continues to be an upward trend in purchase activity. Conventional and FHA purchase applications drove most of the increase last week as some buyers moved to act early this season,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Refinance applications declined over the week and remained at low levels. There is still little incentive for homeowners to refinance with rates at these levels.”

Homebuilder D.R Horton released Q1 earnings last night that missed Street expectations. Earnings per share rose 2% YOY, while revenues rose 7%, indicating that margins are contracting. Part of the issue was a decline in gross margins, which was due to hedging costs related to the company’s use of buy-downs to incentivize homebuyers. By using buy-downs, homebuilders can “cut” the price of the home to the buyer without disturbing the comps. Headline price stays the same, but the borrower gets the price cut via a subsidized mortgage.

Orders rose 35%, but average prices are decreasing as consumers prefer lower price points. The stock was down 9.2% on the day. The homebuilders have been on a tear for the past year, so any disappointment was likely to have an outsized reaction.

The S&P Homebuilder ETF XHB was on a tear last year, rising almost 60%.

The builders are still being somewhat cautious, which is surprising given the demand out there. D.R. Horton’s single family homes under construction fell to 900 units or so at the end of the year.

Meanwhile, apartments are flooding the market, especially in the hot MSAs like Nashville, where developers are having to get quite promotional to get occupancy – i.e. 4 months of free rent. Supposedly Nashville will see 37,000 new units hit the market this year. Suffice it to say, over the past several years the US has overbuilt multi-fam and under-built SFR.

The US economy started 2024 on a strong note, according to the flash PMI. “An encouraging start to the year is indicated for the US economy by the flash PMI data, with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures. Output measured across both goods and services rose in January at the fastest rate since last June, growth momentum having stepped up a gear on the back of improved demand conditions. New orders inflows have now picked up for three months, buoyed in particular by improving sales to domestic customers, helping lift business confidence about the year ahead to the most optimistic since May 2022.”

Importantly, inflation was the lowest since October 2020, indicating the Fed’s tightening policy has worked. We get the all-important PCE data on Friday before the Fed meets next week.

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