US Housing Market: Subprime Crisis Culprit, Why Is It So Resilient This Time?

Hello everyone, here is the Dolphin's summary of the combination strategy for this week:

Last week, the US real estate data was released, conveying the core message that under the high interest pressure, due to the overall low inventory, the adjustment amplitude of this real estate cycle is not large. By May, there are signs of rebound in the number of privately-owned residential buildings and newly-built residential buildings that have already started construction, and even second-hand houses are in a stage of slow climbing in both volume and price.

In the future, the US real estate market is likely to be in a "gradually frozen" buying and selling balance state with few sellers and buyers under high interest rates and low inventory, which will not constitute a major drag on the economy.

After the hawkish statement by the Federal Reserve last week, the market began to reconsider the possibility of interest rate hikes in the second half of this year and the expectation of recession after short-term interest rates rise, leading to a global market correction.

These two weeks are generally a blank period: the US stock earnings season has not yet officially started (it will officially start in mid to late July); from the perspective of the technology-driven cycle, the current technology stocks have already risen to this valuation position and need to wait for further performance verification.

From a macro perspective, the most important PMI, employment, hourly wage, and CPI data for May are already known, and this week, the PCE price index and personal consumption expenditure data will be released to cross-check with the previously released CPI and social zero data. This is not new data, and it is estimated that these two weeks will still be in a sideways consolidation state.

As Dolphin mentioned in the previous combination strategy, the repair market of Chinese assets has come to an end, and the valuation of US technology stocks in the holding position is also relatively high. Therefore, a large-scale reduction has been made, and the current equity position is about 55%, waiting for the earnings season to come and looking for opportunities after actual performance delivery.

I. Did US real estate rebound in May?

Originally, the industry most affected by high interest rates - the real estate industry - seems to have shown signs of rebound, especially when upstream and downstream data both point to the bottom of the real estate market.

First is the number of newly approved private residential buildings: it rebounded significantly again in May, and the number of approved residences has turned into positive growth of 5%+. Secondly, the newly-built private residential buildings that have already started construction in May have also turned from negative to positive on a MoM basis, and the MoM after seasonal adjustment has increased significantly to 22%.

In addition, the US second-hand housing transactions in May also showed signs of recovery: the average transaction price of second-hand housing has come out of the price reduction quagmire since the beginning of this year, and after gradually stabilizing and rebounding for three months, the transaction volume of second-hand housing also returned in May, with a MoM growth of 3% after seasonal adjustment. In May, the US second-hand housing realized a weak rise in both volume and price.

Currently, from the perspective of the market's turnover speed, due to the fact that the number of second-hand housing listings is much less than before the epidemic, the turnover speed of second-hand housing is three months, which is still significantly lower than the 3-4 months before the epidemic.

And currently, the repayment quality of residents' housing loans is also in an unprecedentedly good position: not only is the default rate (90 days) of residents' mortgage loans at a historical low, but also the proportion of housing loans that have been transferred to 90-day defaults is also at a historical low.

Another interesting piece of data is that after several rounds of rapid interest rate hikes, the US mortgage rate, which peaked in October last year, has not risen further this year. Currently, the 30-year mortgage rate has stabilized at around 6.6%, and has even fallen slightly.

Combining the data from upstream and downstream, we can see a clear picture:

Since the thorough destocking of residential real estate after the subprime mortgage crisis in 2008, the stock of second-hand houses is not large, and the pressure to sell is not particularly high. Therefore, even with high interest rates, the US has not experienced the stormy adjustment brought about by excessive lending from the previous subprime mortgage crisis, from upstream real estate construction to downstream real estate sales.
From the actual mortgage rate, unlike the LPR+ interest rate premium for domestic housing loans, the US housing loan interest rate did not rise proportionally with the basic interest rate after entering 2023. Instead, as the interest rate hike approached the end, the mortgage rate actually fell.

Overall, this round of real estate adjustment seems to be not significant, so it does not have a serious drag on the economy. However, from the data of turnover vs. new housing inventory, the current new housing turnover cycle is still relatively long, approaching eight months.

Dolphin tends to believe that in the case of sustained high interest rates, even if this round of real estate destocking is not intense, real estate will also get rid of the influence of high interest rates and directly enter the market state under the normal situation in the past, which is more inclined to a "frozen" balance state where sellers and buyers are scarce under low inventory.

2. So, will the US continue to raise interest rates?

There is no problem with the economy at present, and the credit contraction of the banking system is also basically crawling at a snail's pace. From the latest disclosed data, there is a tight monetary policy: M2 in the US has shrunk by nearly 3% compared with the end of last year under the background of monetary tightening, and the basic interest rate has risen by 75 basis points.

However, the tight credit in the real economy is not obvious: the balance of credit granted by banks to industry and consumption still has a positive growth of 1.2%, and is still in net investment. In this case, although the Fed paused its rate hikes at the latest meeting, it still left itself some room for policy operations by hanging a hammer over its head, saying it would raise rates by another 50 basis points within the year (there are four more meetings in July, September, November, and December this year).

As the Fed's hawks guide the target interest rate up another 50 basis points, last week's market trading seems to have returned to a more recessionary direction: the 10-year Treasury yield remained largely unchanged, while short-term yields rose, and the inverted yield curve worsened, implying an increased expectation of economic recession.

These two weeks are generally a lull period: the US stock earnings season has not yet officially begun (it will start in early to mid-July), and from a technical perspective, with technology stocks already at this valuation level, further performance verification is needed.

From a macro perspective, the most important PMI, employment, hourly wage, and CPI data for May are already known, and this week, the PCE price index and personal consumption expenditure data will be released to cross-check with the previously released CPI and social retail data. This is not new data, so it is estimated that these two weeks will still be in a consolidation phase.

III. Portfolio Rebalancing

Last week, Dolphin made a relatively systematic rebalancing of its virtual portfolio, in which it reduced some overvalued positions in US stocks based on the current high valuation of technology stocks, and at the same time, it reduced some stocks in Hong Kong that had rebounded to the end and returned to reasonable valuations. Specifically as follows:

IV. Portfolio Returns

In the week of June 23, Alpha Dolphin's virtual portfolio fell by 4.2%, significantly weaker than the S&P 500 (-1.4%) and the CSI 300 (-2.5%), but stronger than the MSCI China Index (-6.9%) and the Hang Seng Tech Index (-8.4%).

Since the start of the portfolio testing until the end of last week, the absolute return of the portfolio was 18.2%, and the excess return compared to the MSCI China was 41% (the original Wind statistical data had some problems, and the excess return was higher after being updated). From the perspective of net asset value, Dolphin's initial virtual assets were 100 million US dollars, and now it is 120 million US dollars, with a net value of 1.2).

VI. Individual Stock Profit and Loss Contribution

Last week, the market was generally down in the context of the hawkish stance of the Federal Reserve and the market's upward adjustment of the terminal interest rate. Generally speaking, companies with weaker fundamentals have relatively larger declines, and the correction of stocks with larger short-term gains is also relatively large.

In terms of the market, US leading technology stocks with stable fundamentals and the support of the technology cycle are relatively resistant to decline, and the adjustment amplitude is not large. The overall decline of Chinese assets is still relatively large.

The specific reasons for the rise and fall of the companies that are at the forefront are summarized by Dolphin as follows:

VII. Portfolio Asset Distribution

After this week's portfolio adjustment, a total of 24 stocks or ETFs were allocated, including 5 stocks with standard ratings and 18 stocks with low ratings, and the rest were gold, US bonds, and US dollar cash.

As of last weekend, Alpha Dolphin's asset allocation and equity asset holding weights are as follows:

Risk Disclosure and Statement of this Article: Dolphin Disclaimer and General Disclosure

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