A Weak Housing Market Should Be A Boon For Rentals, But Data Is Causing Doubts

(Wednesday Market Open) Equity index futures were flat ahead of the opening bell as investors anticipate an economic update from Federal Reserve Chairman Jerome Powell on Friday.  

Potential Market Movers

The U.S. Census Bureau released its preliminary July durable goods orders report which came in lower than expected as a big goose egg. Forecasters expected growth of 0.6%. However, core durable goods orders were better than expected for the month, rising 0.3% and beating the estimate of 0.2%. When excluding defense spending—the part that is actually added to GDP—orders rose 0.4%, above the projected 0.3%, but lower than the previous print of 0.9%.

Durable goods failed to move market much as the S&P 500 futures ticked slightly lower with the Cboe Market Volatility Index (VIX) unchanged.

Meanwhile, the housing market continues to see lower demand, according to the Mortgage Banker’s Association. Last week, mortgage applications fell 1.2% while the average 30-year mortgage rate rose from 5.45% to 5.65%. After the market open, the National Association of Realtors will release its pending home sales report.

A survey from Bankrate.com showed that 70% of adults are worried about a recession by the end of the year. Some analysts fear that the negative tone could become a self-fulfilling prophecy as consumers could choose to hold back on purchases and companies might wait to make growth investments that could help spur the economy.

Friday’s Michigan Sentiment report should provide more insights into how consumers are feeling.  

President Joe Biden is expected to announce a $10,000 student loan forgiveness program today. According to Business Insider, the program will be targeted at borrowers making less than $125,000 a year. A Wharton School estimate says the program could cost $300 billion this year.

Earnings reports continue to flow in and here’s how investors reacted to a few of them during the premarket session.

• Petco WOOF missed on top- and bottom-line numbers due to higher costs, and its stock fell 5.79%.
• Intuit INTU reported better-than-expected earnings and revenues and rallied more than 5%. Company management expressed confidence in the company’s long-term outlook.
• Nordstrom JWN reported a miss on earnings estimates despite topping revenue expectations. Yet it lowered its full-year earnings outlook, causing the stock to fall 14%.
• Urban Outfitters URBN also missed on earnings but hit revenue estimates on the nose. The stock fell 1.47% as it continues to struggle with higher costs and supply chain issues.

Earnings reports from Nvidia NVDA, Salesforce.com CRM, Snowflake SNOW, and Autodesk ADSK are also expected later today.

Peloton PTON announced a deal with Amazon.com AMZN to sell exercise bikes through their platform. The news sent Peloton’s stock 16% higher ahead of the market open. 

Reviewing the Market Minutes

In light of Monday’s selloff, stocks remained relatively strong yesterday with the Nasdaq ($COMP) going out several decimal places to close 0.0002% lower on the day. The S&P 500® index (SPX) was off by 0.22% and the Dow Jones Industrial Average ($DJI) fell 0.47%.

Twitter TWTR fell 7.32% on news that its former security chief blew the whistle on what he alleged was the company’s weak cybersecurity policies. Peiter “Mudge” Zatko claimed that the company’s security practices were putting users’ personal information at risk. There’s plenty of debate whether the news affects the court case between Twitter and Tesla TSLA CEO Elon Musk over Musk’s attempt to back out of his acquisition of Twitter.

The biggest U.S. economic report of the day was July new home sales falling 12.6%, according to the U.S. Census Bureau. The number of new homes sold last month was projected at 575,000 but came in at 511,000. Year over year, new home sales were down 29.6% to their lowest level in six years.

The assistant vice president of the National Association of Home Builders’ Danushka Nanayakkara-Skillington said the report was “another clear indicator that housing is in a recession.” Nanayakkara-Skillington cited higher construction costs and rising mortgage rates as the reasons behind the weaker numbers.

However, homebuilder stocks were relatively unfazed by the news as the S&P Homebuilders Select Industry Index fell just 0.32%.

The real estate sector was the worst performer of the S&P’s 11 sectors with the Real Estate Select Sector Index falling 1.46% on the day. However, this sector focuses on REITs which are a much more diverse group of real estate investing strategies than just homebuilding. 

CHART OF THE DAY: BREAKING FLOORS. The S&P Homebuilders Select Industry Index ($SPSIHO—candlesticks) has surged recently, rallying more than 30% from its June low to its August high. However, the homebuilder index broke its short-term trendline, which some technical analysts interpret as a sign the index is ready to resume its downtrend. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

PRICED TO SELL: Home prices are expected to keep falling, according to data from Redfin (RDFN). The real estate firm said 21% of home sellers dropped their asking price in July, the highest number since the real estate platform started tracking price cuts in 2012. The biggest cuts were in states that had experienced an influx of the pandemic migrations. Boise Idaho, Denver Colorado, and Salt Lake City Utah saw 69.7%, 58%, and 54.8% of sellers cut their home prices in July.

ROOM TO RENT: While the housing market continues to weaken, the rental market remains strong, right? Well, maybe not. Though common wisdom suggests that people who can’t buy homes flood the rental market, RealPage says foot traffic for apartments is falling. Normally, rental foot traffic tops out in mid-summer, but the real estate analytics company said that it topped out back in March and has been pretty much falling ever since.

Apartments saw higher-than-normal traffic in 2020 and 2021 due to many people ditching major cities during the earliest days of the pandemic. That might suggest that declining rental interest could be a part of a “normalization” period. However, against a weakening housing market, the lack of rental interest is concerning.

EVICTION CONVICTION: The federal pandemic renter eviction moratoriums ended in June of 2021, but several states that extended those moratoriums have been ending them over the last few months. Now evictions are rising dramatically. A National House Law Project survey found that rental evictions in U.S. Housing and Urban Development-assisted homes have risen to pre-pandemic levels and could possibly go higher.

Similar stories are popping up around the nation. Data from the Legal Services Corporation found that evictions in Virginia were back to 2019 levels. The New York Department of Investigation reported eviction increases each month in 2022.

Meanwhile, the Oregon Law Center reported that evictions have risen consistently over the last few months with 1,122 in March, 1,188 in April, 1,266 in May, and 1,470 in June. The number of evictions related to nonpayment grew from 48% in July of 2021 to 68% in June of 2022.

For renters, there could be some relief. RealPage reported that rents rose just 0.8% from June to July, just a third of the increase seen at the same time in 2021. The firm said growth in rents appeared to be slowing on a 12.2% annual basis in July against the previous year’s 13.8%. If housing is seeing a correction, rentals will likely see one too.

Notable Calendar Items

Aug 25: Gross domestic product (GDP) and earnings from Dollar General (DG), Workday (WDAY), Dollar Tree (DLTR), Ulta Beauty (ULTA), Burlington Stores (BURL), and Gap (GPS)

Aug 26: Fed Chairman Jerome Powell speaks at Jackson Hole, PCE price index, Michigan Consumer Sentiment, Personal Income, and earnings from Marvell Technology (MRVL) and Dell (DELL)

Aug. 29: Dallas Federal Reserve Manufacturing Index

Aug 30: CB Consumer Confidence, JOLTs Job Openings and earnings from Crowdstrike (CRWD), Hewlett Packard (HPE), Chewy (CHWY), Best Buy (BBY), and Big Lots (BIG)

Aug 31: Earnings from Polestar Automotive (PSNY), Trip.com (TCOM), Cooper (COO), and Five Below (FIVE)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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