Federal Reserve Sees Need for More Government Spending… The Federal Reserve released the minutes of its July meeting. The bankers discussed the need for more federal government action to mend the economy but didn’t suggest specific moves by the Fed.
What it means— Federal Reserve staff dialed back their forecast of economic growth for the rest of the year, noting the uptick in COVID-19 infections and the plateau in business re-openings. That wasn’t a surprise.
The Fed governors discussed the need for more fiscal stimulus, essentially more free money from Washington. That wasn’t a surprise, either. However, the bankers weren’t in any hurry to an agree on what they would do in terms of additional monetary policy if the economy remains weak. Sure, they’ll continue to purchase $120 billion worth of Treasury and mortgage bonds each month, which is 75% more than they were buying at the height of the Great Financial Crisis, but they didn’t nail down a plan to let inflation run or to peg long-term interest rates.
This lack of clarity might be smart. It gives the bankers more room to change processes in the days ahead. It wasn’t what investors wanted to hear. They want to be sure that the Fed has their back and will flood the market with more dollars at the first sign of weakness. The news, or lack thereof, drove the markets lower.
Initial Jobless Claims Back Over 1 Million… The number of Americans filing for unemployment for the first time increased from 971,000 last week to 1.11 million
What it means— The specific numbers aren’t that important, because there is so much noise in the data, including the seasonal adjustments. The big idea is that the numbers aren’t falling, which is decidedly bad.
Continuing claims dipped slightly from 28.3 million to 28.1 million, but again, the little wiggles aren’t that important. With the pandemic still spreading and businesses facing more restrictions, we can expect these numbers to remain elevated for some time. If Goldman Sachs is correct, 25% of furloughed staff will be permanently unemployed. That will be a major stumbling block for economic revival.
Meanwhile, the clock is ticking on mortgage foreclosures and deferments and landlords are gearing up for evictions with their renters. It could be a very ugly fall.
July Housing Starts Jump 22.6%… Housing starts blew past expectations of 1.252 million units on an annualized basis, jumping to 1.496 million units.
What it means— In a bit of good news, housing starts are up 23.4% from this time last year and are just 7% off of their pace before the pandemic.
But before we get too excited, it’s worth noting that multifamily housing, or apartments, were up 56.7%, and single-family housing starts were up a much more modest 8.2%. It’s the right direction, but it’s not nearly as great as it looks in the headlines.
Falling rents in major metropolitan areas like San Francisco and New York show that people are trying to relocate to the suburbs, which is driving the real estate market. But the market is still held back by a lack of inventory. Unfortunately, if we see a spate of foreclosures this fall, we might get the added inventory we need, just not in a good way.
Existing Home Sales Rocket Higher 24.7% in July… Sales reached the highest level since December 2006, right after the top in the housing bubble.
What it means— Sellers are firmly in control. Inventory remains scarce with sellers cautious about having virus infected strangers possibly walking through their homes. Buyers are leaving big cities and flooding the market. The Northeast and West drove sales, up 30.6% and 30.5%, respectively. Existing home sales were 8.72% higher than in July 2019 helped along with low mortgage interest rates.
The news was just as strong on pricing. The median existing home sale price reached $304,100, up 8.5% over last year, and it’s the first time in history that the price has breached $300,000. As with new homes, it’s all about supply. Existing home inventory now sits at just 3.1 months.
The rush out of cities to the suburbs should drive two trends—rising home ownership in general and falling rents.
Rising home ownership is generally considered a good thing. Homes represent the biggest asset for most families. Falling rents in urban areas, however, aren’t so great. Those new homeowners must come from somewhere, and it’s not likely that most were living in their parents’ basements.
Falling rents lead to falling property values, which lead to lower tax revenue and many other knock-on bad effects. It’s something to watch for. Presently, housing related exchange traded funds are benefiting. XHB is part of our Global and Aggressive portfolios.
Joe Biden Accepts Nomination for Democratic Presidential Candidate, Kamala Harris Accepts VP Nomination… It’s taken him more than 30 years, but Joe Biden has finally landed the nomination. Kamala Harris made history as the first black woman to land a spot on the ticket.
What it means— If we didn’t have COVID-19, we could have conversations about policy matters: healthcare initiatives, the Green New Deal, taxes, etc. The candidates could outline their priorities and proposals as clearly as possible so that voters could make informed decisions. Instead, the time between now and the general election will be spent by both sides developing hit pieces meant to inflame, not inform. Oh, wait a second, we could say that about most elections.
California Lawmakers Propose Wealth Tax That Could Hit the Rest of Us… A group of California state lawmakers proposed a 0.4% tax on wealth, excluding directly held real estate, that exceeds $30 million for single and married filers and $15 million for married people who file separately. California already has the highest taxes in the nation, so what’s a little more?
What it means— On the face of it, this looks like one more attempt to drive anyone with exceptional wealth out of The Golden State, but the lawmakers could be a forecasting a Biden win and the potential rollback of the state and local tax (SALT) cap of $10,000.
SALT was part of Trump’s 2017 tax reform. It puts the pain of high state taxes squarely on the state’s constituents. If the cap comes off, as Democrats have pledged to do, then taxpayers in high-tax states can once again write off big state and local tax liabilities on their federal taxes.
It’s not clear that a wealth tax would be included in the regular calculation of SALT, since it’s typically to deduct income and property taxes. If it does, then this means shifting the increased California tax burden to the rest of the nation through lower federal tax receipts.
Data supplied by HS Dent Research
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