The Federal Reserve’s statement from its last meeting and policymakers’ subsequent comments sum up the current situation as follows: U.S. economic growth has been strong, unemployment is low, and inflation is running slightly above the central bank’s target.

That’s great news.

Against that backdrop, the Fed should increase interest rates at its next meeting.

However, could a deteriorating housing market put a damper on those plans?

Maybe.

The Fed wants as much “ammo” as possible to deal with the next downturn so that it won’t need to resort to quantitative easing and other extraordinary measures.

The more the central bank can increase interest rates without crashing the economy, the better.

I’m not calling for an imminent recession.

That happened before the financial crisis in 2008?

You got it… the housing crash.

I remember that bust quite clearly because I owned a few rental properties and suffered the consequence of not listening to Harry’s warnings!

Granted, I’d just met Harry and Rodney and was already trying to dump properties that were leveraged and barely profitable on a cash-flow basis.

Real estate is a lot harder to liquidate than stocks, so I couldn’t just put in a “sell” order.

But I learned a tough and expensive lesson: Real estate doesn’t always go up in value.

Housing Cracks?

You’d have thought lenders and buyers learned their lessons from the last real estate boom and bust… but here we are again: Zero-down loans are back.

No income? No job? No problem!

But the housing market is starting to show signs of weakness. And that’s even with historically low interest rates!

The July 27 issue of Treasury Profits Accelerator highlighted my heightened concerns about the housing market.

Existing-home sales have declined for two consecutive months and were flat prior to that. New-home sales, which are fewer in number but more important to the economy, also fell sharply.

Interest rates are moving higher, and the Fed has forecast two more hikes in 2018 and three in 2019.

The July data on housing starts and permits did little to dispel my fear.

After dropping by more than 12% in June, housing starts ticked up by less than 1% in July. The consensus estimate had called for a 7% increase.

Ouch.

Housing permits, on the other hand, were better.

Permits were up by 4.2% year over year. Filings to build single-family homes were up over 6%.

Permits are less reliable than starts because builders can change their plans if they don’t think they’ll have buyers.

Housing starts mean that a builder has begun excavation and that the home will likely be completed and then, hopefully, sold.

It’s still a little early to say housing is in a downturn, but these trends bear watching.

Spending Away!

Home purchases may have slowed, but retail spending remains healthy.

U.S. retail sales jumped 0.5% in July, handily beating expectations for a 0.1% bump. Excluding autos and gas, retail sales climbed 0.6% month over month, topping the consensus forecast for a 0.4% increase.

Here’s the bad news: The Commerce Department lowered its estimate of June sales growth to 0.2% from 0.5%. This revision also brought core retail sales, which exclude autos and gas, to 0.2% from 0.3%.

That means July’s strong retail sales in part reflect the downward revision to the June data. But, overall, consumers are still spending more.

Treasury Yields Drop

Long-term Treasury yields have declined from 3.12% to 3.02% over the last 10 days.

Aside from the latest trade war developments, the bond market seems to be focused on weaker housing data.

Tomorrow, we’ll get new-home sales data for July.

Preparing ahead of time for the types of surprises these reports often generate is what we do in Treasury Profits Accelerator.

(My publisher would appreciate it if I add that “Preparing ahead of time for…” is another way of saying “Profiting from…”)

To good trading,

Lance

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Lance Gaitan
Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.