This Sure Doesn’t Feel Like a Recession Yet

No one wants to sell their house—which is helpful for people in the business of building new homes.

In retrospect, it seems pretty obvious that one of the consequences of extremely low-interest rates would be a reluctance of people to part with homes. A huge proportion of American homes are now financed by long-term mortgages attached to interest rates that are three percent or even lower. This means that most home-sellers need to find a buyer willing to pay a far higher rate and must accept paying a higher rate on their next home.

While this is a drag on existing home sales, it appears to be a boon for home builders. Builder confidence rose again in April, according to the National Association of Home Builders (NAHB). This is the fourth consecutive month of improving confidence for builders.

“Builders remained cautiously optimistic in April as limited resale inventory helped to increase demand in the new home market even as the industry continues to grapple with building material issues,” the NAHB said.

NAHB Chief Economist Robert Dietz said that one-third of homes for sale are new construction, far above the typical 10 percent share.

“More buyers looking at new homes, along with the use of sales incentives, have supported new home sales since the start of 2023. And while AD&C loan conditions are tight, there is not significant evidence thus far that pressure on the regional bank system has made this lending environment for builders and land developers worse,” Dietz said

“AD&C” refers to loans for “acquisition, development, and construction.” Dietz is saying that the credit crunch that many expected to follow the collapse of Silicon Valley Bank has not happened.

Fed Data Points to Bank Stability

The most recent report from the Federal Reserve on bank balance sheets points to a waning of stress on the financial system. The balance sheets of large banks—defined as the top 25 banks by assets—expanded modestly, and the balance sheets of smaller banks contracted a bit. But there was not sign of a widespread flight from banks in general or from smaller to larger banks.

What’s more, lending expanded. Large banks saw their books of loans and leases grow by $13.1 billion, according to the Fed’s H.8 report. Small bank loan books grew by $3.1 billion. The largest driver of this expansion was commercial and industrial loans, which grew by $10 billion at large banks and $2.7 billion at small banks.

The upshot is that the loan market is not tightening as rapidly as expected, which puts more of the onus on the Fed for tamping down inflation. At the very least, the latest bank balance sheet data confirms the need for another hike at the Fed’s meeting in early May.

Earnings Have Been Strong So Far

Thirty companies in the S&P 500 reported earnings last week. Bank of America’s analysts report that 90 percent beat estimates for earnings per share, 73 percent beat on revenues, and 67 percent beat both.

That is a well above the week-1 earnings record for last quarter. The historical average is for 67 percent beating on earnings per share, 64 percent on sales, and 48 percent beating on both, according to Bank of America.

This is hard to square with the idea that the economy is on the brink of a recession.