Mixed Economic Results

Poor Home Sales and Strong Corporate Earnings

Mixed Economic Results
May 5, 2014

As we headed into May 2014, we were greeted with a mixed bag of economic news.

On the positive side, corporate earnings are very robust, with Apple's $45.6 billion in quarterly sales registering an $11.62 per share earnings, prompting Apple to issue a seven-for-one stock split to make their stock more affordable for the average investor.

On the negative side, according to information published by HUD and the Census Bureau, sales of new homes in March 2014 took a precipitous drop from 449,000 to 384,000 – a 14.5% decrease. The National Association of Realtors reported that existing home sales also dropped, albeit slightly.

Wall Street reacted to this news with a slightly disappointed shrug. The stock market took a temporary dip but is still going strong overall. As of this writing, the Dow is well over 16,000.

The housing market had been starting to recover from the summer of 2013 until the recent setback. Estimates were so far off that analysts have been throwing all sorts of excuses at this issue to see what sticks — the weather, low housing inventory, tight lending practices, and increasing interest rates, among others. Some are calling the sales report an anomaly and expect housing to rebound.

Why, in such a strong market with record earnings, would the housing market still be so weak? The weather cannot be to blame forever, home prices have been rising and enticing people who have been holding back on putting their houses on the market, lenders have begun to ease up on tighter lending restrictions imposed in early 2014, and interest rates have been relatively flat over the first quarter.

One possible explanation is that most homebuyers who qualified for a mortgage or refinancing and were in a position to take advantage of the low interest rates have already done so. It may take time for the next wave of home purchases to build momentum – the trends need to go a bit further to release the next round of housing demand to be met.

Is it possible that the housing recovery has hit a wall?

The housing recovery may not be tracking the market and corporate earnings because those earnings are not making it back to homebuyers in any liquid form. Their 401(k)s may be doing well, but their wages are stagnant, and the job market is still uneven, with unemployment (as of April 2014) at 6.3%.

Corporations are still sitting on their cash in record amounts. According to Reuters, companies worldwide had nearly $7 trillion of cash and cash equivalents on their collective balance sheets – roughly double the amount from 2003. Some cite uncertainty, driven by healthcare costs and expectations as well as various world events, as the reason to hoard cash. For whatever reason, it is not being reinvested in capital – and more importantly, job creation.

Another consideration is that the so-called "jobless recovery" may be that way for a fundamental reason. Many of the economic drivers, like Google and Facebook, do not create as many jobs in their creation of massive revenue as do traditional manufacturing companies. Are we now in a cycle where chronic higher levels of unemployment cut into home sales by definition, as more people are unable to afford them?

The next year should provide some clarity. While we cannot predict world events, the dust should settle a bit after the healthcare situation for businesses becomes clearer, and the chaos of an election year comes to a close. The most likely result through the remainder of 2014 is, unfortunately, a continuing mixed bag of positive and negative economic results. Stay tuned.

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