Saturday, April 26, 2008
More reports of housing market weakness and generational lows in consumer sentiment highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index up 0.5 percent to 1,398, now down 4.8 percent for the year, and the yield of the 10-year U.S. Treasury note rose 14 basis points to 3.91 percent.
Existing Home Sales: Sales of existing homes fell 2.0 percent in March to a seasonally adjusted annualized rate of 4.93 million units. Sales are down 19.3 percent from last year at this time and 31.4 percent below the peak in 2005.
Regionally, sales fell 6.5 percent in the Midwest and dropped 3.5 percent in the South while rising 2.2 percent in both the Northeast and West.
Some are beginning to call this a "bottom" in home sales since the last seven months have been fairly flat, however, this may or may not be the case.
As shown in the chart, after the plunge from the 2005 highs, a clear "leveling off" began in late-2006 which was then followed by a sharp two-month increase. This, however, proved to be a "false bottom" that was quickly followed by another plunge in early-2007.
One thing is certain, as long as inventory remains at historically high levels - now 9.9 months of supply - home prices will continue to decline unless sales improve dramatically.
The median home price rose 2.5 percent in March to $200,700 but prices are down 7.7 percent from year-ago levels, a slight improvement over the year-over-year decline of 8.2 percent in the last report. The median price for existing single family homes is now down 13.5 percent from the peak, an all-time record decline.
With a growing number of foreclosures coming onto the market and with banks slowly starting to lower asking prices in order to begin moving their growing inventory, while there may be some stabilization in home sales, there is little reason to think that any stabilization is in store for home prices.
New Home Sales: Unlike existing home sales, new home sales show no sign of forming a bottom as volume continues to weaken and inventory continues to grow. The inventory of unsold new homes now stands at a whopping 11 months of supply, far above the typical figure of 4 or 5 months.
Note that new home sales account for roughly 15 percent of all home sales - the existing home market is six or seven times as large.
New single family home sales fell 8.5 percent in March to 526,000, a new 16 year low, after a 5.3 percent drop in February where the total was revised sharply downward.
Sales fell across all regions, led by a 19.4 percent decline in the Northeast and, from the peak in 2005, overall sales are now down 63.1 percent, the largest peak to trough decline since 1969.
The median price of a new single-family home declined from $244,200 in February to $227,600 in March and, on a year-over-year basis, prices have fallen 13.3 percent. Note that the current price declines do not factor in the many and varied builder incentives that are now commonplace. With the inventory of unsold homes now standing at such high levels, look for further price declines ahead.
Initial Jobless Claims: Initial claims for unemployment insurance dropped to their lowest level in almost two months, a surprising 33,000 plunge to 342,000 from an upwardly revised 375,000 the week before, and no special factors were cited. Of course, it's important not to make too much of the week-to-week data as it can be volatile, but the four-week moving average has moved down slightly in recent weeks and now sits at 369,000, well below the psychologically important level of 400,000 that is usually associated with recessions.
Much more will be known about the health of the nation's labor market when the monthly nonfarm payrolls are reported next Friday.
Consumer Sentiment: The final reading of 62.6 in April for the Reuters/University of Michigan consumer sentiment index confirmed the mid-month reading of 63.2, far below the level of 69.5 seen in March.
Higher food and energy prices continue to take a toll on the consumer as this index reached its lowest level since 1982 when inflation was still in the 6-8 percent range, though down considerably from highs of over 14 percent in 1980.
The "current conditions" component fell 8.6 percent from March and "expectations" fell 11.3 percent including a huge 13.0 percent decline in expectations for business conditions and a 10.7 percent drop in expectations for personal finances.
The rate of inflation expected one year from now rose to an 18-year high of 5.7 percent, making the job of "anchoring inflation expectations" even more difficult for the Federal Reserve. This is one of the primary reasons why most believe that, absent another credit market crisis, short-term interest in the U.S. will not go much lower.
Summary: The housing market continues to worsen. Though existing home sales may be leveling off at what is a historically low level, that will have little impact on declining home prices as long as the massive inventory overhang persists. For new homes, the sales and price picture grows even darker, likely to result in more job loss in residential construction.
Durable goods orders remain very soft, down slightly in March but off 2.1 percent from year-ago levels indicating further weakness in manufacturing. Weekly jobless claims, a good leading indicator for the labor market in general, continued their recent improvement but, as has been the case before, this could simply be a pause before resuming the well established downward trend that has been in place since late last summer.
The fate of the economy will increasingly hinge on the consumer and, given the recent decline in both major surveys that track their mood - the Reuters/University of Michigan consumer sentiment index and the Conference Board's consumer confidence index - unless there is a sharp drop in energy and food prices along with some stabilization in home prices, this long-time support of the U.S. economy in the form of domestic consumption is likely to falter, making the current downturn longer and more serious than it would otherwise be.
The rebate checks start coming this week, however, it sounds like they are much more likely to be used to catch up on bills or build up a cushion for higher food and energy costs in the period ahead rather than to stimulate new consumption.
The Week Ahead: The coming week will be highlighted by the first look at economic growth in the first quarter on Wednesday and the labor report on Friday. Also scheduled for release are reports on consumer confidence on Tuesday, the ADP employment report and the Chicago purchasing managers' index on Wednesday, and reports on both personal income/spending and ISM manufacturing on Thursday.