It is no secret that rising interest rates sink home sales. Even though interest rates are still at historical lows, the housing industry has seen lower sales, lower applications for housing permits and rising rates on mortgages. One central reason is workers cannot afford new housing with little affordable units for sale. This aspect surfaced in the earnings news from Home Depot. They had a rare earnings miss. What the media is overlooking is the flippers.
Remodeling
Ever since the financial crisis of 2008, home flipping has disappeared. Well, that is not true entirely. Flippers returned to their original role by buying distressed homes, remodeling them and returning them to the market. These homes are generally more affordable, but flippers have turned to up-scale neighborhoods. They have abandoned the entry level, starter homes for the big bucks. In addition, there are no more distressed bargain homes for sale in the market. This is what is hurting Home Depot's bottom line. The loss of flippers and this aspect will reveal itself going forward. This too, will hurt housing sales going forward along with rising interest rates.
On the flip side of flippers, KKR is starting a new program to lend money to flippers. Of course, these mortgages will be shorter in term and come with a higher interest rate. And so, we have begun again to chip away at housing precautions. The road to trouble has been cleared.
A new start-up called Ribbon is offering home buyers "cash." The thinking is cash buyers "appear" stronger on paper and have their offer accepted. If the buyer ultimately fails to secure a purchase mortgage, Ribbon will buy the home and offer it to the buyer or re-sale market. This company is speeding on the trouble road.
Finally, NBR reports that homes sales declined last month. This is big since this is the busiest time of the year for home sales. In addition, permits are down and new starts was revised lower. With higher rates coming, our most important consumer category is looking weak. This same weakness was reflected in the earnings miss by Toll Brothers. They blamed the miss on higher wages and costs of materials. Funny, no one mentioned lumber which is off the charts. Homes just got more expensive.
Gasoline
The price for a gallon is close to $3.00 nationally and I predict it will smash through that figure. Yes, the US is now the largest producer of oil, but lobbyists got permission to sell aboard. Our democracy in action. Ha!
Whenever you talk oil, you have to include the dollar. The dollar stopped its downturn and it is now rising or at least at a higher level. A rising dollar should keep gas prices low. However, this is not happening. The crack spread has risen from $1.85 three months ago to $2.26. This is a Fibonacci expansion level. There could be a retracement, but oil seems to be heading for $75 a barrel. This is a huge move and we will pay at the pump. It also means that $2.50 wholesale, is within range. At that wholesale price, we can expect to pay $3.50 at the pump. Ouch!
With world demand is rising and OPEC is manipulating production. Russia is selling to China, and the supply glut is dwindling. The basic supply/demand curve is in effect. Bottom line: less money in our pockets and the market will also feel pain. It will be reflected first in the airlines as American and Southwest will tell you.
Recycling
Get ready for higher taxes due to landfill concerns. This is probably another area where the Federal Reserve does not keep track of costs in their phony, manipulated matrix to figure inflation. As stated above, the price of gas has risen .57 cents year-on-year a gallon, but the Fed keeps saying that there is less than 2% inflation. So much B.S.!
Anyway, if I were to ask you what is our largest export to China over the past 20 years, what would you say? The answer is surprising. It is Garbage. That's right, but the Chinese importers are upset and I can see their valid point. Instead of dumping in our landfills, we send to China our used cardboard, cans, etc. under recycling. Now, the Chinses say to us, clean up our act. What they are saying is that we have included waste in our junk. With local cutbacks, our recycling plants have left egg shells in crates, pizza slices in boxes and sauce in jars. We are suppose to separate this crap from the recyclable parts. This complaint has nothing to do with tariff talks. This is just between an exporter and importer. It is so typical of us. We cut corners and now, it is coming back to bite us in the ass and our noses too. We could not only lose our most successful export, but pay through higher garbage rates and taxes for landfill concerns.
