July 29th, 2013 12:32 PM by Nick Rapplean
One day, the recent day when New Home sales for June were reported, for example, we get further indications of the real estate market's strength from which investors of all stripes extrapolate a sense of vibrant growth for the entire economy. This pleasant state of affairs lasts, oh, maybe a couple of days, or minutes, and soon the dour economic voices are once again worrying about a slowing economic recovery. This morning, for example, The Wall Street Journal's first page "What's News" section tells us: Only about half the firms in the S&P 500 have reported second-quarter earnings, but the results are raising concerns that profit growth could stall unless economic expansion accelerates.
The article to which this small header refers tells us that retailers have been, at least, until recently, increasing their profits by cutting costs and squeezing suppliers, noting that this can only go on for a short period of time. What we need is a continuing recovery that is credible and strong.
So the world turns to the American economy the way the nation once turned to Joe DiMaggio, hoping it will hit a few out of the park and create a winning team. And all we seem to have is the real estate sector, slugging away, reporting great sales, especially among New Homes, whose builders currently hold a lot of power because they can build just enough homes to keep demand high.
We cannot help but wonder, though, at the assumptions that seem to keep investors waiting up nights, waiting expectantly for better economic data in the mainstream economy. While low mortgage rates, attractive home prices, increased flexibility among lenders, and a good deal of pent-up demand among potential buyers are all motivating more sales than in the recent past, there are fewer reasons to get excited about other sectors of the economy.
Let's amend that, because rising mortgage rates seem to be kicking dents into existing home sales. The number of home sales contracts in June edged down 0.4% from total contracts in May. This, indeed, may provide us with a very meaningful indicator for the coming few months, because even as small a decline as 0.4% suggests that higher interest rates may be having a negative effect on real estate sales that is slightly weightier than all the forces making a home purchase attractive.
And there is something else weighing on the minds of some analysts. We hear and read a great deal about the QE3 failing in its mission to keep the recovery percolating along. Perhaps this misses the point. Perhaps it is those who are willing to pretend away (rather than finally doing something about) the Sequester, the coming debate over the nation's debt ceiling, and the need to stop investing $85 billion a month in QE3.
With these problems hanging over the world economy like knives, just how certain can we be of an enduring recovery, even as the real estate sector continues to give us good numbers? And without a sense of certainty, even if it is slightly flawed, how can we possibly expect investors to put their money on future growth? Even in real estate?
Rome burned as Nero fiddled. The economy keeps giving us little reminders that it can do the same.