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Earlier this week, I posted that U.S. jobs and the economy are on trend. The Federal Reserve Beige Book also sees on-trend low but steady growth.

While job and GDP growth are slow but steady, the housing market is heating up, driven by cash buyers including hedge funds.

As Home Sales Heat Up Again, Buyers Must Resort to Cold Cash

New York Times, June 8, 2013


The percentage of homes bought with cash has shot up in many markets across the nation. Nearly a third of all homes purchased in Los Angeles during the first quarter of this year went for all cash, compared with just 7 percent in 2007. In Miami, 65 percent of homes sold were for cash deals, compared with 16 percent six years ago. ...

All-cash buyers, typically investors eager to renovate and quickly resell or rent out homes, are making it more difficult for first-time buyers, who typically rely on mortgage loans that can take weeks or months to materialize. More California homes have been flipped in the last year than in any year since 2005. ...

While offers have typically included appraisal clauses, allowing buyers to back out if the home was valued below what they were willing to pay, offers today are more likely to include escalation clauses, saying buyers will pay an additional amount over the highest bid. ...
[end quote]

With demand high and inventories low, builders are again receiving orders for new construction. Building permits are rising although the level is still at the level of previous recessions.

If the demand for new housing continues to rise (after all, the Fed has been buying $85 billion in mortgage bonds every month for many months), construction workers will be hired and the economy will benefit from increased income and demand. This is what the Fed has been hoping for.

In a normal economic cycle, interest rates rise during recovery due to increased demand for borrowed money from consumers and business. Even though the Federal Reserve has repressed interest rates, the yield curve is climbing at the longer end. TIPS yields are also climbing across the entire yield curve. Benchmark bond indexes are falling (since bond prices move opposite to interest rates).

TIPS have been available for about 10 years. Since 1/ 2003, 10 year Treasury (10 YT) and 10 year TIPS yields have changed radically, but the spread between them was relatively constant. The spread is the "implicit" rate of inflation -- bond traders' expected inflation rate over the time period of the bond. Perhaps not coincidentally, this is almost identical to the Federal Reserve's targeted inflation rate.

TIPS & 10 YT Constant Maturity Rate, 1/1/2003 - 6/6/2013

TIPS 10Y Spread
Min -0.87 1.43 0.12
Max 3.07 5.22 2.72
Avg 0.75 2.98 2.23
StDev 1.19 1.17 0.36

Within the noise, the 10YT-TIPS spread is almost exactly the same now as it was during the mid 2000s. The spread has been quite stable (with some noise) since the end of the 2008-9 financial crisis.

Inflation is in the 2% range, so the bond market is calm.

These messages of stability have reassured the stock market. Last week, there was some decline in risk-on indicators, but we have seen similar fluctuations before so this may be noise.

Foreign stock markets fell, some of them strongly. The USD dropped against several major currencies as the Aussie continued to fall.

The METAR for next week is fair but partially cloudy, much like my local late spring weather. I do not see any strong risk-off indicators.

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