Unintended Consequences

Follow this one… how the recent rise in retail sales might bust the housing “recovery”:

“Retail sales growth is understandably proving meager and hard to regenerate,” writes our macro sage Rob Parenteau, “in a nation where private debt deleveraging is under way and net job generation has yet to return. The early read on consumer expectations for October shows a seven-point drop, which is very indicative of the hesitancy that we suspect will characterize the tentative return to higher spending by U.S. households. Too many rugs have been ripped out from underneath them over the past two years.

Weak Return of Retail Sales

“The shallow recovery in the dollar level of retail sales is, nevertheless, enough to help produce a positive GDP result for Q3, with consensus estimates centering on 3.5% of late. As this will mark an official end to the severe recession, one consequence is that Treasury bond buyers may be reluctant to add to their exposures, especially with the Fed’s quantitative easing for this asset category ending in a month. The housing recovery is tentative enough that a backup in mortgage rates into year-end would undoubtedly prove problematic.”

Right on cue, mortgage rates have abruptly spiked. The average 30-year fixed, which fell all summer, has popped from 4.8% at the start of October to 5.2% today.

30-Year Fixed Rate

These rates (and the yield on 10-year treasuries) have risen lately, thanks mostly to the Fed, whose mortgage market manipulations, as Rob Parenteau noted, are on track to wind down soon. More on that in a minute…

And thus, as rates rise, mortgage applications fell 13% last week. The Mortgage Bankers Association said yesterday that weekly refis fell almost 17%, while applications for new mortgages declined 7%.

So put it all together… withdrawing government intervention, rising rates and falling applications… and you get this: From June 2009-June 2010, the median U.S. home price will fall another 11.3%. According to research published this week from Fiserv, home values will likely drop next year by about as much as they did this year… ouch.

The firm expects 342 out of 381 markets to record losses, with Florida, California, Nevada and Arizona leading the way (again). Value investors should check out some screamin’ deals in Detroit: Already home of the lowest median home price in the U.S. ($50,000 — not a typo), prices in Detroit are expected to fall another 9%. If you’re looking to weather the storm, check out Kennewick, Wash., the biggest winner of the survey, where prices are expected to rise almost 9% next year.

The Daily Reckoning