FedEx misses delivery on earnings

Stocks rose yesterday on continued year-end momentum as investors chase profits. Housing starts stunned analysts by jumping in October, adding more confusion to the industry.

Sheltered. If you want to put the brakes on rapidly rising home prices, you simply raise mortgage rates and buyer demand will decline. So the theory goes. It is true, if financing costs go higher, buyers can afford to buy less house for the same monthly payment. I am not sure if you remember, but home prices soared starting in mid-2020 as folks rushed to nest, thinking that the pandemic would last forever. When I say “soared,” I was not exaggerating. Check out this chart from the Federal Housing Finance Agency which shows annual house price index change. You will note the clear rise with increased demand, and the clear decline with increased mortgage rates. It’s so extreme, that it is worth noting.

Can you see it? So, is the rapid slowdown in home price growth a result of affordability alone? Well, it turns out that it’s more complicated than that. We have to factor in buyer behavior. If you heard that mortgage rates went up from 3% to 8% (and they did), and you were considering buying a home, you would probably resolve to suspend your purchase until you heard that mortgage rates have come down. That decrease in demand is also a cause for price inflation to moderate. It may not be direct, but the net result is what the Fed was ultimately hoping for. So, is that it? Are we done? Can we just go back to normal?

Of course, it is not that simple. This chart only shows that price inflation has slowed (disinflation) and not that prices have come down (deflation). If I showed you the actual FHFA House Price Index itself, you would see that the index is at an all-time high, dating back to 1974 when the index was first published. That simply means that homes are still super-expensive. What do you suppose the cause is for that?

Well, the cheap money that existed from 2008 through 2022 certainly had a hand in spurring demand for homes. Let’s go back to basic microeconomics and remember that there are two principal drivers of price. There is demand, which is what we have been discussing up to this point and what the Fed focuses on, but there is also supply. Remember that if supply goes down, prices go up. That doesn’t just apply to cars, TVs, and Beanie Babies. No, it also applies to home supply. At this point, it gets really complicated, so I am going to oversimplify it to get the point across.

It turns out that there are very few existing homes on the market these days. Why? Most likely because of high interest rates. If you sell your home, you need to go somewhere else. Even if you are not financing your next home with a mortgage, prices are still sky-high. That makes homeowners reluctant to put their homes on the market, thus perpetuating the problem. Witnessing that rapid rise in home prices may also be causing homeowners to hold out for greater gains yet. Is it messy? You bet. But not all is lost. Enter: homebuilders.

Homebuilders are filling the supply gaps caused by reluctant sellers. I will spare you a second chart which clearly shows a significant increase in new housing starts. The number surged with the pandemic and also declined with rise in interest rates last year, however, they have been climbing consistently and considerably since late last year. What are the implications of that? Well, increased supply implies that price inflation may ease even more. Building permits are also trending higher, which means yet more supply may be coming to the market, helping to further ease climbing home prices. That is good news for prospective homebuyers. However, for existing homeowners who were holding out, the news may not be as upbeat. Spring and summer are high season for house hunting, and it will certainly be an interesting one. But wait, winter hasn’t even started… I believe that happens tomorrow ⛄… so we have some time think about all this, but we can at least say that things are heading in the right direction. Now, sit back and sip on your hot chocolate.

WHAT’S SHAKIN’ THIS MORNIN’

FedEx Corp (FDX) shares are lower by -10.71% in the premarket after the company announced that it missed EPS and Revenue estimates last quarter. The company, further, also provided full-year guidance that shows a single-digit decline in revenues after previously expecting flat growth. Dividend yield: 1.8%. Potential average analyst target upside: +4.7%.

General Mills Inc (GIS) shares are lower by -2.58% in the premarket after the company announced a revenue miss for last quarter. The company provided full year guidance that was below analysts’ expectations. In recent weeks, 5 analysts have lowered their price targets while 2 have raised them. Dividend yield: 3.53%. Potential average analyst target upside: +5.2%.

YESTERDAY’S MARKETS

NEXT UP

• Existing Home Sales (Nov) is expected to have declined by -0.4% after falling by -4.1% in October.
• Conference Board Consumer Confidence (Dec) may have risen to 104.5 from 102.0.
• Fed speakers: Goolsbee and Harker.