The Week's Economic Reports

Following is a summary of last week's economic reports. Mixed reports on new and existing home sales highlighted the data during a week that was relatively thin on economic news. For the week, the S&P 500 Index fell 0.4 percent to 1,422 and the yield of the 10-year U.S. Treasury note rose 11 basis points to 4.88 percent.
Leading Economic Indicators: The Conference Board's Index of Leading Economic Indicators (LEI) rose 0.3 percent in December after downwardly revised readings of -0.1 percent in October and 0.0 percent in November. The monthly LEI readings were negative for much of 2006 with an overall result for the year of -0.1 percent. The only two categories that declined in the most recent report were consumer expectations and interest rate spread.

Existing Home Sales: Sales of existing homes fell in December after having risen in both October and November. Prior to the October rebound, sales volume has declined for seven consecutive months and 11 of the last 12 months going back to September of 2005. From the mid-2005 peak annualized rate of over 7 million housing units, current sales levels are down over 13 percent, having declined 10.8 percent in 2006.

Inventories are still quite high, easing from 7.3 months in November to 6.8 months in December and the number of unsold homes is 23 percent higher than a year ago. The median price was up 2.3 percent for the month and unchanged for the year at $222,000.
Despite claims of "bottoming out" by the National Association of Realtors and many economists, it is far too early to predict a rebound ahead, the implied outcome that is surely intended to spur purchases by fence-sitting potential homebuyers. The warm start to the winter and other seasonal factors make the spring months ahead much more significant in assessing the health of the housing market.

In an odd sort of commentary that probably speaks louder than any other words associated with the most recent data release, David Lereah, chief economist for the National Association of Realtors (NAR), said, "With fingers and toes crossed, it appears that we have hit bottom in the existing home market."

Fingers and toes?

New Home Sales: New home sales surprised to the upside in December rising 4.8 percent following a 7.4 percent increase in November. This marked the first back-to-back increases in almost two years and follows a period when volume declined in 11 of the previous 15 months. Inventory fell from 6.1 months in November to 5.9 months in December and prices rose modestly during the month. On a year-over-year basis, the median price was down 1.8 percent to $245,300.

While many observers will point to rising volume and stable pricing as signs of a rebound, this data does not include cancellations and builder incentives that would paint a much different picture. Cancellations, still unusually high at over 30 percent (much higher in some areas) are not added back into the builders' inventory and builder incentives totaling tens of thousands of dollars are commonplace.

Durable Goods Orders: The December report on durable goods manufacturing exceeded expectations, posting a 3.1 percent increase following an upwardly revised 2.2 percent rise in November. This follows wild swings of +7.8 percent in September and -8.3 percent in October, the continuation of a very volatile series where civilian aircraft production has a disproportionate impact on the monthly change. Overall, new orders for durable goods rose 2.6 percent in 2006, down from year-over-year changes of between five and fifteen percent earlier in the year, coming off of significantly lower levels in 2005.

Summary: The housing data paint a mixed picture of the real estate market during a time of year that often sees odd data reporting due to seasonal factors (i.e., volume is normally low at this time of year and unusual weather has an outsized impact on sales volume). Not much should be made of any of the housing news this week, save for the desperate tone of the NAR's chief economist.

In the mainstream media, reporting on both new and existing home sales focused on the year-over-year decline for 2006 - existing home sales fell 8.4 percent and new home sales were down 17.3 percent. This too seems to be much ado about very little as year-over-year data is available with each month's report - the December report carries no special meaning other than it concludes a calendar year. For purposes of assessing the current state of the housing market, undue emphasis on the year-over-year change in this month's reporting is a bit misleading.

The Week Ahead

In a busy week ahead, economic news will be highlighted by the first look at fourth-quarter GDP on Wednesday and the labor report on Friday. Other reports include consumer confidence on Tuesday, employment costs on Wednesday, personal income and the Institute for Supply Management's manufacturing index on Thursday, and factory orders on Friday.

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Chart courtesy of Northern Trust.