Home Sales
Existing home sales fell 2.2% in the month of July from June. Compared to July 2022, sales were down 16.6% and homes sold as the slowest July pace since 2010. Demand has definitely been hit by rising interest rates and on Monday, the average interest rate on 30-year mortgages rose to 7.48%. This was the highest level since November 2000. It will be interesting to see how home sales are impacted in the reports over the next couple months as existing home sales are based on closings which means these contracts for the current report were likely signed in May and June. The supply of homes has also been a heavyweight on the sales levels as there were just 1.11 million homes for sale at the end of July. This is down 14.6% compared to last July and is the lowest level since 1999. Looking compared to pre-Covid levels, there are half as many homes available for sale. While the tight inventory has depressed the sales rate it has kept prices elevated and there was actually a 1.9% increase in the median price of a home compared to last July.
Durable Goods
The headline number for durable goods orders may worry some and give them reason to question the strength of the economy, but as always you have to look deeper into those numbers. The headline showed orders fell 5.2% in the month of July, but much of this decline came from Boeing. Orders for commercial planes can be extremely volatile and in the month of June they soared 71%, but then in July fell 44%. If the volatile transportation sector, which includes automobiles and planes, is excluded orders actually increased 0.5% in the month. Excluding the volatility created by Boeing, durable goods orders have now increased three months in a row. With all the volatility from Covid, I do believe the manufacturing sector and the overall goods economy can continue to strengthen from a challenged level over the past year.
Pay Decline
We said a few years ago that eventually workers would be coming back to the office and they would not have the same leverage for getting higher pay. That time may be just around the corner. According to ZipRecruiter, the average pay for the majority of jobs has declined from last year with some of the steepest declines being seen in technology, transportation, and other jobs that had big hiring back two years ago. ZipRecruiter conducted a survey in July with about 2000 employers and the results revealed that nearly half of the employers said they had reduced the pay for recent job openings. I don’t see the this reversing. I think in the next year or two we will see further declines in pay as competition for jobs comes back to a more normal level.
Ad-Free Streaming
The Wall Street Journal predicts that those of us that are watching ad free streaming could be paying 25% more in late 2024. I’m beginning to think that maybe having cable with my old DVR was not such a bad deal after all.
Home Price
The number of people in California that can afford a median priced home currently stands at only 16%. Back 10 years ago 56% of people in California could afford the median priced home. One of two things has to happen going forward, either the income of people living in California has to increase or the price of homes needs to come down. What do you think is more likely?
Home Values
One other area of strength for the economy has been higher home values. This has led to more equity for homeowners as the total hit over $16 trillion in the month of June. Looking at tappable equity, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home, it rose to $10.5 trillion, just 4% off the peak that was hit in 2022. This means per homeowner there is roughly $200,000 worth of tappable equity. The only problem here is the cost to utilize that equity has grown substantially with rising interest rates. I do believe as rates normalize over the next couple of years this could provide a nice resource for consumers to continue to grow the economy. I will also say that people worry about a potential 2008 type recession, but with all the home equity I don’t foresee anything remotely similar. Just 344,000 homeowners across the country currently owe more than what their properties are worth and only 3.9% of homeowners have less than 10% equity which compares to 6.6% in 2019. Overall, I continue to believe the economy will be alright.
Housing Market
New home sales continue to benefit from the lack of supply in the existing housing market. In the month of July, new home sales were up 4.4% compared to the month of June. This produced an annualized rate of 714,000 which is the highest since February 2022 and up 31.5% compared to last year. While the lack of inventory has been a benefit, the affordability could limit potential upside in the sales rate.
Streaming Usage
According to Nielsen data, linear viewing which combines broadcast and cable made up less than 50% of TV usage in the month of July for the first time ever. This comes as streaming usage saw a 25.3% increase in time compared to last year and occupied 38.7% of TV usage in the month. It looks like cord cutting has continued to accelerate.
Hot Sauce Price
It appears people’s love for hot sauce has grown over the years. Since 1980 chili pepper consumption in the US has more than doubled. In 2021, 7.91 pounds of chili pepper’s per person were consumed in the US. This compares to 6.59 pounds per person in 2010, 5.15 pounds per person in 2000, and just 3.05 pounds per person in 1980. While demand is high the crop is finicky and could lead to an increase in prices. It does great in very hot weather but is vulnerable to drought and too much moisture is also a threat. Another problem with harvesting the chili pepper is the number of people willing to do the fieldwork is shrinking. This could produce problems at the grocery store as consumers would be paying more for hot sauce. As an example, Huy Fong Foods, which makes a popular Sriracha sauce, cut production due to some bad harvests. This sent prices surging to $70 or more for its 28-ounce bottle. You can normally find this in the grocery store for less than $10. Spicy-food lovers beware as you might want to take a closer look at the price for that bottle of hot sauce you love before buying it.
NVDA
After Nvidia’s (NVDA) blow out earnings report I was surprised to see the stock has now fallen over 2% since the numbers came out. Earnings per share of $2.70 beat the estimate of $2.09 and revenue of $13.51 B easily topped the estimate of $11.22 B. Guidance was also impressive as revenue in Q3 is expected to be around $16 B, this would be an increase of 170% compared to last year. The lack of gains following a big report like that may be concerning for current investors as the valuation concern may have kept other investors away and led to some taking profits after the big gains this year. The company still trades at over 40x Jan 2024 estimated earnings which tells me the stock is priced for near perfection. If the company hits any speed bumps the stock could tumble quickly.