The week's economic reports

More bad news for housing and a disappointing report on durable goods orders highlighted the week's economic data. Stocks and bonds ended the week with the S&P 500 Index up 2.4 percent to 1,535, now up 8.2 percent for the year, and the yield of the 10-year U.S. Treasury note rose one basis point to 4.41 percent.

Existing Home Sales: Sales of existing homes fell much more than expected in September, plunging 8.0 percent from August to an annualized rate of just 5.040 million, the lowest level since 1999. On a year-over-year basis, sales declined 19.1 percent and volume is off an even 30 percent from the peak in 2005. Sales were down across the entire country with the most severe drops occurring in the West and the Northeast.

Inventory set a new eight year record at 10.4 months, up from 7.3 months a year ago. The current level of homes for sale is almost double the six month inventory that typically delineates a "seller's market" from a "buyer's market" and this figure does not include many of the bank-owned properties and other foreclosed homes that are on the market.

The median home price fell from $224,400 in August to $211,700 in September as the credit market tumult and "drying up" of funding for jumbo loans caused many higher priced sales to be cancelled and, as a result, the median price to be pushed down. The year-over-year price decline of 4.9 percent was the largest on record.
This report covered sales that closed in September, meaning that the sales agreement would have been signed in July or August. While this data reflects the tightening in credit, it does not necessarily reflect the change in the mood of home buyers as a result of the events of August and September. While both the median price and sales volume may bounce back in the months ahead, given the amount of negative coverage on housing and mortgage lending, a sustained rebound is not likely anytime soon. An increasing number of analysts do not see a housing turnaround until 2009 at the earliest.

Durable Goods Orders: Orders for durable goods fell 1.7 percent in September, following a downwardly revised 5.3 percent decline in August, led by a sharp drop in durable defense orders. Excluding defense, durable goods orders increased 0.7 percent, but this report was far short of the rebound that most analysts expected from the month before. Orders fell 8.4 percent and shipments declined 1.1 percent while inventory grew, further confirmation of the slowdown in manufacturing that has been exacerbated by the credit market problems.

New Home Sales: Sales of new homes rebounded from a downwardly revised annualized rate of 735,000 in August to 770,000 in September. While the headlines may have indicated a 4.8 percent increase, comparing the original August release that showed 795,000 sales to the original September data indicates a 3 percent decline. The September data is likely to be revised downward when the October report is released, part of a continuing pattern of downward revisions to prior data that make this data set a very poor source of newspaper headlines.

On a year-over-year basis, sales were down 24 percent and, from the peak in July of 2005, sales have declined 45 percent. The inventory of new homes for sale fell from 9.0 months in August to 8.3 months in September and the median price rose 2.5 percent for the month but was down 2.8 percent on a year-over-year basis.

Recall that prices paid do not reflect builder incentives and that cancellations, now averaging about 50 percent for major homebuilders, are not included in the sales totals - the net purchase price and the actual total of closed sales are much lower than this report indicates.

Also note that new home sales are recorded when contracts are signed as opposed to the existing home sales report that reflects closed sales. As such, this data on new home sales covers September activity following the onset of the credit market problems in August, the initial plunge in sales being seen in last month's report.

Consumer Sentiment: Rising fuel prices and worsening housing market problems led to a gloomier outlook by consumers as the Reuters/University of Michigan consumer sentiment index fell from 83.4 in September, to a mid-October reading of 82.0, and then to a final October reading of 80.9. The index has now declined in seven months out of the last nine and is at the lowest level since May of 2006 when gas price shocks hit consumers' wallets.

Summary: Both new and existing home sales continue to decline. The headlines of a rebound in new home sales are wildly off the mark and when taking into account all recent housing data, it should be clear that the housing market has yet to find a bottom. As the lack of availability and the higher cost of jumbo loans were big factors in both the sales and price declines for existing home sales in September, it will be important to see how the high-end market fares in the months ahead.

For much of the last year, median home price declines have been somewhat muted because of the drop off in sales at the low-end while higher priced homes continued to sell. With jumbo mortgage now more difficult to get and with rates now much higher, more substantial median home price declines will probably be seen in the months ahead.

The continuing decline in consumer confidence and a disappointing report for durable goods orders after last month's sharp decline offer more evidence of a slowing economy. There has yet to be any major stress in the labor market, however, and anecdotal evidence still suggests that employment, the most important of all economic indicators, remains in much better shape than other economic indicators. This may soon change, but, then again, many observers have been expecting the labor market to weaken substantially for a long time now.

The Week Ahead: The week ahead will be highlighted by the FOMC announcement and the first look at third quarter GDP, both on Wednesday, and the monthly labor report on Friday. Also scheduled for release are reports on consumer confidence on Tuesday, construction spending and ADP employment on Wednesday, and personal income/spending, the ISM manufacturing index, and pending home sales on Thursday.