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Today’s Featured Topic

Homebuilders Losing Steam as Affordability Keeps Diving

In late May, MRP closed its Long US Housing theme after a very strong 6-year run. The foremost reason for this closure was falling affordability due to excessive materials and labor costs, tightening inventory, and rising interest rates.

In the two months since then, these issues have begun to weigh on the housing sector. The S&P Homebuilding Select Industry touched 10 month-lows on Wednesday, following a spate of bad earnings for companies including Owens Corning, Whirlpool Corp., and Beacon Roofing Supply Inc. The S&P Supercomposite Homebuilding Index retreated 3.3%, its fourth straight day of losses, with all 15 members in the red.

Housing completions continue to hold their ground for now, but prospects for future weakness continues to manifest in planned construction. Housing starts declined 12.3% in June from the prior month. Residential construction permits, an indicator of longer-term direction, were 3.0% lower than the permitting pace of June 2017, a shock to analysts whose consensus estimates forecast an increase of 2.1%. New home sales tumbled 5.3% YoY below a downwardly-revised May figure to an annualized pace of 631K, the slowest in 8 months. The median price of new homes sold during the month was $302,100, 4.2% lower than in June 2017. Existing home sales also slipped 0.6% MoM and 2.2% YoY. However, median prices for exisitng homes rose 5.2% YoY in June, setting a new high of $276,900. Even with falling new home prices, the National Realtors Association’s Housing Affordability Index continues to drop towards its long-term average of 125, having declined from 195 in April 2012 to 141 currently.

Slower buying has indeed freed up supply somewhat, as the inventory of homes reached 5.7 months of supply, the most in 10 months and up from 5.3 months in May. However, this may be a sign that the number of buyers are simply wearing too thin.

According to the St. Louis Federal Reserve’s database, producer prices for lumber, as well as average hourly earnings for construction employees, have hit new all-time highs in 5 out of 6 months in 2018. Softwood lumber, largely imported from Canada, has seen prices increase at an especially steep pace due to 21% tariffs, which are inflating home prices by an average of $9000.This is has the effect of removing more candidates from the buyers’ pool since, for every $1,000 increase in the price of a house, 150,000 people are priced out of the market.

ADP noted this week that the shortage of both skilled and unskilled construction personnel has pushed up their wages across the country by 7.1% over the last year, compared to a 3.0% average increase for all US workers. The rapidly climbing wages are indicative of a broader labor shortage in the US work force, but is also due to a wipeout of residential construction workers who went on to pursue other trades in the wake of the 2008 housing crisis.

In February, MRP raised the possibility that higher mortgage rates, coupled with the Fed’s sustained tightening of monetary policy could boost home sales in the short-term, as prospective homebuyers would feel pressure to find a home sooner, before rates climb even higher. However, with 30-year fixed rate mortgages hitting 4.52% (down a bit from this year’s high of 4.66% in May), that boost has not materialized. Mortgage applications to purchase a home fell to the lowest level since May this week, while mortgage application volume was 12.6% lower than a year ago. While rising mortgage rates typically help slow price growth, lack of inventory and inflation have all but muted any alleviation. Further, it remains cheaper to rent than to own. Themonthly aggregate housing cost to the average American homeowner is currently $587, compared to only $516 for renters.

Although sentiment is still positive among homebuilders, the luxury segment of the market is nearing saturation. That will force builders to eventually shift toward moderately-priced homes, which will eat at their margins. In the six years that MRP had long US Housing as a theme, the Home Construction ETF (ITB) returned 165% against the S&P’s 101% gain. Even since we closed the theme, the ITB has declined 3%, while the S&P has climbed 4%.

We’ve also summarized the following articles related to this topic in the Construction & Real Estate section of today’s report.

  • Housing: New-home sales slump in June as housing headwinds increase
  • Housing: Homebuilders Fall to 10-Month Low on Sales Data, Earnings Miss 
  • Housing: Housing Permits Soften, Starts Plummet
  • Housing: The low-priced home shortage continues
  • Housing: Could Fintech & Blockchain Lending Further Drive The Housing Market Boom?


Chart: Home Construction (ITB) vs S&P 500 (SPY)


Other Disruptive Change

Economics & Trade

  • Trade War: Many Chinese companies ‘will go bankrupt’, if US delivers on tariff threats, court newspaper warns

Politics & Policy

  • Corporate Taxes: Across the globe, taxes on corporations plummet

Monetary Policy

  • FX: China Targets Economy, Not Trump, With Weaker Yuan


  • Cryptocurrencies: Bitcoin Mining Giant Bitmain Eyes $1 Billion Pre-IPO Financing
  • Fintech: UK fintechs aren’t eating the banks’ lunch just yet


  • Luxury Brands: LVMH’s Luxury Allure Eclipses Fears of Trade War in China
  • Cannabis: Pot smokers are setting aside their joints in favor of edibles, pills and extracts


  • Satellites: SpaceX Sends New Batch of Iridium Satellites Into Orbit
  • Autonomous Vehicles: Ford follows GM’s Cruise move with self-driving spinoff


  • Oil: The Regulation That Could Push Oil To $200
  • Crops: US pledges $12bn aid for farmers hit by trade war
  • Meat: Meat and poultry stockpiles nearing record due to growing production and slowing exports

Energy & Environment

  • Batteries: Stanford Researchers Create Liquid Metal Flow Battery Optimized For Energy Storage
  • Batteries: Ten years left to redesign lithium-ion batteries
  • Wind: UK Offshore Wind Set To Double As Government Confirms Future Auctions

Biotechnology & Healthcare

  • Gene Editing: Top EU court: GMO rules cover plant gene editing technique


  • Endnote: Everything You Need To Know About What Amazon Is Doing In Financial Services


Joe Mac’s Market Viewpoint





CAPEX Booms!

The Federal Reserve has said for years that it wants to get inflation in the U.S. back to 2% per year. Some indicators are already showing inflation rates higher than that. But, the Fed persists with its fixation on the core personal consumption expenditures (“PCE”) deflator as a superior measure. That number has been stuck below 2% since May 2012. The trend of the inflation data, however, may be changing soon.

Joe Mac’s Market Viewpoint: CAPEX Booms! 


Other Viewpoint Reports

Joe Mac’s Market Viewpoint: The Inflation Complication 

Joe Mac’s Market Viewpoint: A Review of MRP Themes 

Joe Mac’s Market Viewpoint: The Coming Value Rotation 

Joe Mac’s Market Viewpoint: Beyond the Bond Bubble 


Current MRP Themes





Autos (S)


Electric Utilities (L)






Long-Dated UST (S)


Defense  (L)


Industrials (L)




Materials (L)


U.S. Financials & Regional Banks (L)


ASEAN Markets (L)




Oil & U.S. Energy (L)


France (L)


Greece (L)




Saudi Arabia (L)


Palladium (L)


U.S. Pharmaceuticals (S)




Gold & Gold Miners (L)


Robotics & Automation (L)


Video Gaming (L)




Lithium (L)


Steel (L)


Value Over Growth (L)



Solar (L)




Obesity (L)


Major Data Points







US Stocks Surge on Trade Concessions

Wall Street closed deeply in the green on 25 July 2018, as strong earnings and reports that President Trump secured concessions from the European Union to avoid a trade war boosted investors’ confidence. The Dow Jones jumped 172 points or 0.7% to 25414. The S&P 500 climbed 26 points or 0.9% to 2846. The Nasdaq soared 92 points or 1.2% to a new high of 7932, ahead of Facebook’s earnings report. TE



US Crude Oil Inventories Fall More than Expected

Stocks of crude oil in the United States fell by 6.147 million barrels in the week ended July 20th 2018, following a 5.836 million rise in the previous week. It compares with market expectations of a 2.331 million decrease. Meanwhile, stocks of gasoline went down by 2.328 million barrels while markets expected a 0.713 million drop. TE




US New Home Sales at 8-Month Low

Sales of new single-family houses in the United States declined 5.3 percent from the previous month to a seasonally adjusted annual rate of 631 thousand in June of 2018, following a downwardly revised 3.9 percent gain in May. It is the lowest rate since October, worse than market expectations of 670 thousand. Sales in the South fell sharply after hitting their highest level in nearly 11 years in May. TE



US Mortgage Applications Fall for 2nd Week: MBA

Mortgage applications in the United States edged down 0.2 percent in the week ended July 20th 2018, after declining 2.5 percent in the previous week, data from the Mortgage Bankers Association showed. Applications to purchase a home dropped 1 percent while refinance applications rose 0.9 percent. The average fixed 30-year mortgage rate was unchanged at 4.77 percent. TE



UK Mortgage Approvals Hit 9-Month High: UK Finance

British banks approved 40,541 mortgages for house purchase in June 2018, more than upwardly revised 39,528 in May but still down 0.9 percent compared with a year ago. The figure came in above market expectations of 39,100 and hit its highest level since September 2017. TE


Other Disruptive Change





Economics & Trade

Trade War: Many Chinese companies ‘will go bankrupt’, if US delivers on tariff threats, court newspaper warns

China’s judiciary should prepare itself for a possible spike in the number of corporate bankruptcy cases as a result of the trade dispute between Beijing and Washington, state media warned. In an opinion piece published on Wednesday by People’s Court Daily, Du Wanhua, deputy director of an advisory committee to the Supreme People’s Court, said that courts needed to be aware of the potential harm the tariff row could cause. Du said the judiciary should also quickly familiarise itself with the possible complexities of such cases, which are probably unlike those they have handled in the past.

Du said in his article that China’s hi-tech firms could find themselves paying more for imported raw materials, and if their sales markets were closed off they would soon be on the brink of insolvency. Huang Libin, a spokesman for the Ministry of Industry and Information Technology, said on Tuesday that there had yet to be any significant impact on industrial output.

Du also called for a list to be compiled of influential companies and investors in different industries that could be called upon to help restructure any companies that find themselves in trouble because of the trade dispute. SCMP



Politics & Policy

Corporate Taxes: Across the globe, taxes on corporations plummet

Taxes on corporations are plummeting across the globe as countries struggle to keep up with multinational firms shifting their profits to foreign tax havens, economists say in a new paper. The average corporate tax rate globally has fallen by more than half over the past three decades, from 49 percent in 1985 to 24 percent in 2018, the study found.

The international decline in corporate taxes threatens to drain governments of a source of funding for health care and other social welfare programs, while already leading many European countries to adopt larger regressive sales taxes on goods. Proponents of tax cuts have maintained that lower corporate rates spur capital investment and business growth, improving worker productivity and wages. But the academics say the falling tax rates instead reflect a race to the bottom as nations try to prevent multinational firms from “artificially” shifting their profits overseas through accounting gimmicks. This massive tax avoidance — and the failure to curb it — are in effect leading more and more countries to give up on taxing multinational companies. WaPo



Monetary Policy

FX: China Targets Economy, Not Trump, With Weaker Yuan

China is letting the yuan slide primarily to combat a slackening economy, as the government rolls out more pro-growth measures amid an intensifying trade feud with the U.S. At the same time, government advisers and economists say the nation’s leaders will refrain from actively devaluing the currency to hit back at the Trump administration. “China has no intention to turn the trade war into a currency war,” said an official involved in policy making. At 6.7784 per dollar at the close of domestic trading on Wednesday, the yuan has lost 6.9% in three months, and isn’t far off one-year lows.

The slump in the yuan recently drew fresh ire from President Donald Trump, but the fast depreciation reflects bigger economic concerns among Chinese policy makers. Fresh signs of a slowdown are emerging, from softening domestic consumption to rising corporate defaults and weakening investment in highways, factories and the like. That, plus an expected decline in exports as a result of the trade battle, has led Beijing to shift its policy focus toward supporting growth from controlling debt. China’s central bank is pumping more funds into the financial system, enabling banks to make more loans. And local authorities are ramping up investments that had stalled due to Beijing’s tightfistedness. WSJ




Cryptocurrencies: Bitcoin Mining Giant Bitmain Eyes $1 Billion Pre-IPO Financing

Already the world’s most valuable cryptocurrency company, Chinese bitcoin mining hardware manufacturer Bitmain is reportedly enticing investors toward a new $1 billion financing round ahead of its anticipated public listing in Hong Kong. According to regional news resource Toutiao, Bitmain is looking at a new round of financing – its biggest yet – near the end of July that would see firm valued just a peg below semiconductor giant AMD, with a current market cap of $15.5 billion.

Founded in 2013, Bitmain has become the dominant developer and manufacturer of application-specific integrated circuit (ASIC) chips that are commonly used to mine cryptocurrencies like bitcoin. Earlier this year, Bitmain CEO Jihan Wu revealed the company would strategize a marked foray into designing ASIC chips for applications in artificial intelligence (AI) technology. Bitmain has also been diversifying with a number of notable investments of its own. In May this year, Bitmain led a $3 billion financing round of Goldman Sachs-backed cryptocurrency exchange Circle. And the firm also gained a controlling stake in popular web browser Opera with a $50 million investment—— earlier this month. All of which sees a heightened and robust interest among venture capital giants and investors queuing up to get a piece of Bitmain before its anticipated initial public offering (IPO) in Hong Kong’s primary stock exchange later this year. CCN


Fintech: UK fintechs aren’t eating the banks’ lunch just yet

n China, tech giants Ant Financial and Tencent have veritably upended the financial establishment, creating digital ecosystems that bring together social media, e-commerce and payments. In the process, they’ve left traditional banks behind in the dust. For instance, Ant Financial’s Alipay handles more than half of the country’s $15.5trn online payments market, reporting half a billion active users.

In Britain, though, it’s a rather different story. Despite the arrival in January of Open Banking, it seems UK consumers are still pretty loyal to their good old-fashioned banks. The top five most-used apps, measured by the share of the total visitors, were, in order, Halifax, Santander, Lloyds, Barclays, and NatWest. Top of the fintechs is established payments unicorn TransferWise, with just 0.5 per cent of the visitor share in the most recent week. Revolut, which recently announced it had signed up 1 million UK users, has just 0.3 percent of the market share, while Starling Bank has 0.2 per cent.

Perhaps the most telling piece of data is the one showing how many app users also use other banking apps. While 67 per cent of Bank of Scotland users are in monogamous relationships with their banking app, only 22 per cent of users show such fidelity to the Monzo app. For Starling, which also offers current accounts, just 19 per cent of customers only use its app. FT



Construction & Real Estate

Housing: New-home sales slump in June as housing headwinds increase

New-home sales were at a 631,000 annual pace in June, the Commerce Department said Wednesday. Sales of newly-constructed homes tumbled 5.3% below a downwardly-revised May figure, and stood just 2.4% higher than a year ago. The median price of new homes sold during the month was $302,100, 4.2% lower than in June 2017. For the year to date, sales are 6.9% higher than in the same period in 2017, but many housing analysts suspect there’s little momentum left in the market.

Most housing industry participants want to see a stronger pace of construction so that builders can catch up to years of pent-up demand for housing, especially as inventory of previously-owned homes remains at long-time lows. Builder stocks slumped after the data release, with D.R. Horton Inc. and PulteGroup, Inc. both down about 3%.”Bottom Line: This is another sign that housing has levelled off,” wrote Jennifer Lee, senior economist for BMO Capital Markets.

It’s too early to get a real read on where would-be home buyers are turning if they’re not snatching up newly constructed homes, Mark Fleming, chief economist for First American said. “If not new, are they buying existing? Or are they just renting?” It will likely take a few more months before clear trends emerge. MW


Housing: Homebuilders Fall to 10-Month Low on Sales Data, Earnings Miss

U.S. homebuilders are sinking today. Blame that on disappointing economic data and earnings reports that trailed estimates. The S&P Homebuilding Select Industry Index fell 2.8 percent as of 11:07 a.m. in New York, poised for its biggest drop since early April and its lowest closing level since September. The S&P Supercomposite Homebuilding Index retreated 3.3 percent, its fourth straight day of losses, with all 15 members in the red. Owens Corning plunged as much as 14 percent after its second-quarter results missed estimates.

Builders and related companies — like home-appliance makers — were punished Wednesday after data showed U.S. purchases of new homes fell to the slowest pace in eight months in June, and the median selling price declined to the lowest in more than a year. That added to pessimism that appeared Tuesday when data showed existing home sales dropped for the third month in a row in June.

Owens Corning, which makes insulation and roofing shingles, wasn’t the only industry bellwether that has posted worse-than-forecast earnings. The maker of home appliances Whirlpool Corp. plunged 15 percent on Tuesday. And Beacon Roofing Supply Inc. fell 4.6 percent, while the Russell 2000 Building Materials Index is down 2.5 percent in the fourth day of losses. B


Housing: Housing Permits Soften, Starts Plummet

All three measures of residential construction activity performed poorly in June, and the two most closely watched numbers, construction permits and housing starts, fell short of their June 2017 numbers. Despite the monthly and year-over-year declines, the U.S. Census Bureau and the Department of Housing and Urban Development report that activity in the first half of 2018 is still ahead of the same period last year.

The worst numbers were for privately authorized housing starts.  They failed to hold on to their gain in May, dropping 12.3 percent to 1,173,000 units. May’s estimate of 1,337,000 units was revised down from the original 1,350,000.  The June estimate fell below the June 2017 pace by 4.2 percent.

The results didn’t come close to meeting expectations. Analysts polled by Econoday had projected some softening from the May number, a 5.0 percent month-over-month increase as originally reported. Still they were looking for starts in the range of 1,285,000 to 1,350,000 units.  Their consensus was 1,320,000.

Single-family starts were down 9.1 percent from May and off 0.2 percent from the June 2017 number.  The June estimate was 858,000 units compared to 944,000 in May, the latter an upward revision from 936,000.  Multifamily starts dropped by 20.2 percent to a rate of 304,000 units, 15.3 percent lower than the same period in 2017. MND


Housing: The low-priced home shortage continues

The nationwide housing shortage continues but is especially troublesome for homebuyers with a budget of $250,000 or less. Rising labor, land and material costs are slowing down the supply, except at higher prices, which is simply not affordable for the great middle, and that’s where we see the hit in existing sales.

Sales of existing homes are down for the third month in a row due to a shortage of properties, which results in higher prices and pushes some potential buyers out of the market. Existing home sales fell 0.6 percent in June, or 2.2 percent from June 2017. And as prices for new home construction increase, construction in general is on the decline. Housing starts, or the number of new residential housing projects, decreased in June, plunging 12.3 percent. The loss represents the third month in a row of declines or a nine-month low. And with inventory at historic lows and a lack of new construction, existing homeowners are holding on to their homes longer, Wachter noted.

That spells trouble for first-time homebuyers and those looking to upgrade, such as growing families. Meanwhile, inventories in luxury homes valued in the million-dollar range are increasing slightly. But, those affordable, entry-level homes are still facing a lot more demand than their supply. CNBC


Housing: Could Fintech & Blockchain Lending Further Drive The Housing Market Boom?

It is a seller’s market these days for homes across the top U.S. metro areas. Home prices have been rising – up 8% from 2017 – and homes are shifting fast as inventory and days on the market are down according to recent data by 8% and 7%, respectively. That said, home ownership for many remains a distant pipedream. Fortunately for buyers all is not lost.

Key developments in the financial and blockchain technology space are nevertheless changing the dynamics of lending and real estate markets. Take aggregators like LendingTree, who help lenders and borrowers find the right match, while peer-to-peer (P2P) lending services such as the LendingClub enable buyers to crowdfund their purchases. New blockchain services are even figuring into loans for home purchases. Homelend, for instance, is using blockchain smart contracts and tokenization to facilitate – as the venture claims – enhanced P2P home mortgage funding. These financing options are empowering prospective buyers to finally become homeowners despite the current market conditions.

The emergence of these alternative financing options could provide an interesting twist to housing market in the near future. And, it is argued by some industry pundits that if these could transform Millennials into a legitimate market for home ownership then the current climate would surely see change. Indeed, if it proved a significant enough of a sea change, the market could very well see demand for homes continue to rise. Forbes



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