Saturday, July 26, 2008
Gains in both durable goods orders and consumer sentiment offset by worsening existing home sales and jobless claims highlighted the week's economic reports.
Stocks and bonds ended with the S&P 500 Index down 0.2 percent to 1258 (for a year-to-date total return of –13.8 percent) and the yield of the 10-year U.S. Treasury note rose 3 basis points to 4.11 percent.
Existing Home Sales: The National Association of Realtors (NAR) reported sales of existing homes fell 2.6 percent from May to June and are now down 15.5 percent on a year-over-year basis. Increasing inventory continues to outpace the number of homes sold and prices continue their long, slow return to more normal levels.
As noted here many times before, it is quite possible that the level of sales established over the last ten months, approximately 5 million units per months, may prove to be the bottom for this cycle, however, inventory and home prices are more important in determining when a stabilization in the housing market will occur.
Most analysts continue to believe that inventory will remain high due to rising foreclosures and prices will continue to fall for the rest of the year, well into 2009, and perhaps beyond.
Based on the peak-to-trough history of home prices in Southern California experienced during the mid-1990s (i.e., from 1990-91 to 1995-96), anything less than a five year period from peak-to-trough during the current cycle seems unreasonable. This implies that a bottom in home prices might be expected in 2010 or later.
The supply of unsold homes rose to 11.1 months, a new high for the current real estate cycle, and the median price declined 6.1 percent over the last year, from $229,000 to $215,100.
Distressed sales in the form of foreclosures and short sales accounted for about one-third of all resales during the month of June and in many areas where sales are rising - parts of California, Las Vegas, Phoenix - they contribute a much bigger percentage of sales. In their press release, the NAR dismissed the decline in the median home price due to the high concentration of distressed sales but failed to give equal consideration to the nature of the transactions when noting that sales were "rising significantly" in areas with high rates of foreclosure
The NAR really does a poor job at applying spin - see this item from for more on this subject.
New Home Sales: Sales of new homes fell less than expected and housing inventory saw its biggest reduction in 45 years helping to buoy the hopes of those looking for a rebound in home building.
New home purchases fell 2.0 percent in the South and declined 0.9 percent in the West while sales rose 5.3 percent in the Northeast and 2.5 percent in the Midwest.
Incentives and price cuts resulted in a sales decline of just 0.6 percent from May to June, a seasonally adjusted, annualized rate of 530,000 following an upwardly revised reading of 533,000 in May.
The inventory of unsold homes decreased from 10.4 months of supply to 10.0 months and the number of homes for sale dropped 5.3 percent in June to 426,000, the lowest level in almost four years.
The median sales price fell to $230,900, a year-over-year decrease of 2.0 percent, however, sales price figures for new homes are unduly influenced by the mix of homes sold and incentives offered and thus generally ignored.
Trouble at Fannie Mae and Freddie Mac, competition from bank-owned properties, difficult credit terms, and rapidly rising mortgage rates will continue to make a substantive rebound from current sales levels difficult, however, as is the case for existing home sales, it does appear that some stabilization in home sales (at historically low levels) is now taking place.
Durable Goods: New orders for durable goods were surprisingly strong last month, rising 0.8 percent in June after an upwardly revised increase of 0.1 percent in May. Rising exports and rising prices along with a 16 percent gain in orders for defense items were credited for the better than expected showing as the consensus estimate was for a modest decline. On a year-over-year basis, durable goods orders remain in negative territory at -1.1 percent.
The rebound was particularly impressive when considering that new orders improved by 2.0 percent when excluding the volatile transportation category. This category, and particularly the civilian aircraft component, tends to dominate the overall month-to-month changes often-times producing misleading headlines, however, that was not the case in June. Orders for primary metals rose 5.1 percent, electrical equipment was up 5.0 percent, and machinery rose 2.3 percent. Shipments of nondefense capital goods, a key indicator and an important component of GDP, rose 0.5 percent in June.
Consumer Sentiment: The mood of the consumer improved markedly in the late-July reading of the Reuters/University of Michigan consumer sentiment survey.
Of course, this isn't really saying much as both the June and early-July results were at or near all-time lows with data going back to the early 1950s.
Nonetheless, the index rose nearly five points to 61.2 indicating that the consumer outlook has brightened at least a little, a slight moderation in the price of gasoline likely playing a large role.
The outlook for inflation also improved modestly, one-year inflation expectations falling from 5.3 percent to 5.1 percent and the five-year estimate dropping from 3.4 percent to 3.2 percent.
Though the shock of $4.00 gasoline appears to be waning, the more gradual effects of falling home prices, falling stock prices, and increasing stress in labor markets may see the June numbers revisited over time.
Summary: There were a few rays of hope shining through for the U.S. economy last week in reports on sharply higher durable goods orders and the reduction in inventory for new homes for sale, but there was an equal amount of offsetting negative news as well. The improvement in consumer sentiment was better than expected, but coming off of historic lows, not too much should be read into the most recent gain.
While new home sales showed some promise, the much larger market for existing homes (almost ten-to-one in sales) appears to be worsening as the glut of bank-owned properties and short-sales continue to put pressure on home prices while boosting the sales totals. There is much further to go in order to get home prices back to historical norms relative to incomes and rents, down another 10 to 20 percent nationally is what many observers now believe.
More will be known about the job market after the upcoming monthly labor report but initial jobless claims poking back above the psychologically important 400,000 level is not a good omen for what the headlines might read in the week ahead. Overall, it was a mixed week for economic data which, compared to the last few months, is actually a good week.
The Week Ahead: The coming week will be highlighted by the first look at second quarter economic growth on Thursday and two reports on Friday - the labor report and the ISM manufacturing survey. Also scheduled for release are reports on consumer confidence on Tuesday, ADP employment on Wednesday, the Chicago Purchasing Managers Index on Thursday, and construction spending on Friday.