Housing Data In: Not Too Shabby..but!
A: The housing data came out today showing that existing sales were UP from last month (down year-over-year), but prices declined year-over-year. All in all it sends a mixed message as the # of sales increasing is somehwat suprising and will help keep inventory levels from expanding further which would certainly negatively affect housing fundamentals going into 2007. But the price declines from this time last year tell me that buyers are starting to jump in a bit and pick up bargains; a sign of general strength. While this data is lagging and is often revised at a later date, it should lead to a further psychological boost going into wall street bonus season in early 2007, and give sellers a few more months of healthy buyers to prey on. As for hopes of a rate cut, you can kiss that goodbye until at least mid-2007 or later; I'm even starting to think a few more hikes might occur first.
According to CNN Money article released this morning:
The National Association of Realtors reported that the median price of a home sold in November was $218,000, down 3.1 percent from the $225,000 in November 2005. The pace of home sales picked up in November, coming in at an annual rate of 6.28 million for the month. That's up 0.6 percent from the 6.24 million rate in October, and it beat the forecast of a 6.15 million rate from economists surveyed by Briefing.com. But the sales pace was 10.7 percent below year-ago levels of 7.03 million units.As for new home sales data that came out yesterday, the data was more encouraging. According to this CNN Money report released yesterday:
Homebuilding, one of the most battered sectors of the U.S. economy in recent months, showed surprising strength in November, according to a government report Wednesday. New homes sold at an annual pace of 1.05 million, up from the revised annual rate of 1.01 million in October. Economists surveyed by Briefing.com had forecast that home sales would rebound to a 1.02 million pace....but, this report is flawed which is why I don't report on it that often. The article continues:
Still, John Tomlinson, an analyst with Majestic Research who covers the major publicly traded builders, said the government report is missing some signs of weakness in the new home market, including orders for new homes that are cancelled by buyers or incentives offered by builders, such as covering closing costs or extra features on the homes for free, in order to support sales in the weak market.Moving onto a separate source, Yahoo Finance discusses the existing sales report in detail:"I'm not so sure that the pricing has bottomed here," Tomlinson said. "There's still a ton of inventory on the market. When inventory comes more in line with demand, we'll be ready to see an upturn."
The slight increases in sales were not enough to halt a slide in home prices. The median price for an existing home sold in November dropped to $218,000, down 3.1 percent from the price a year ago. It was the first time on record that sales prices compared to a year ago have fallen for four straight months. The report on existing home sales offered further hope that the serious slump in housing that has occurred this year may be bottoming out. It followed a report Wednesday that showed that new home sales rose 3.4 percent in November, the third gain in the past four months.So what does this all mean? Well nothing really if the report is later revised or included a large number of cancelled contracts that were never tallyed back into inventory levels. If anything, its a positive as the data for the most part beat economist expectations and gave stock prices more reason to hold onto recent gains.
As for how this affects monetary policy, it throws out the window any chance of a rate cut in the next quarter or two. That is why you are seeing bond yields start to rise a bit after these reports; as the likelihood of a fed rate cut gets put off for a while longer. In fact, a rate hike might be more likely. Here's why:
GOLD/PRECIOUS METALS ARE STILL HIGH - The price of gold and other precious metals are still trading at very high levels. These guys are inflationary and take time to funnel through the economic system when producers start to feel the pain of rising costs that eventually get passed on to the consumer. I recently heard Steve Forbes debate on CNBC that as long as GOLD trades above $500, there will be distortions in inflation readings that may trick the fed into raising rates. His thinking is a fed move of HIGHER RATES, not lower, in 2007. This is Steve Forbes so its hard to just discount his way of thinking altogether.
STOCK PRICES ARE FLYING - Anyone else notice this? Equities are hitting historic highs in the DOW and 3-4 year highs in the NASDAQ. And to boot, global markets are following suit. So many countries are experience surging equity markets, making me nervous. Remember that stocks are leading indicators of the economy, NOT LAGGING, and as such are obviously pricing in a soft landing, NOT A RECESSION, as corporate profits are strong, wage labor is strong, and the decline in energy prices gave even more ummph to earnings.
Keep an eye out. If housing data doesn't get worse and stocks continue to fly, how on earth will the fed cut rates? They won't! If anything they will have to raise rates to combat inflation and slow down the economy a bit more.
US DOLLAR WEAKNESS - Continue declines in the US dollar are inflationary. As the greenback continues to slide, the fed will have to step in and control the currency. After all, the 2 most important jobs of the federal reserve is to control inflation & maintain pricing stability. A weak dollar is not good news for future inflation and might cause the fed to get more hawkish in future issued statements. Keep your eyes open.
So what does this all mean? Who the heck knows. The two things I will keep an eye out for in 2007 is inflation pressure and energy prices. The stock market will continue to surge as long as energy prices decline. The housing market will continue to stabilize as long as the economy is strong, jobs are stable, and incomes are strong. The question is, what will happen that will affect what Ben Bernanke and company decide to do with short term interest rates.
For now, the housing market should enjoy a few strong months as the lack of horrible data and continued surge in equities should provide for a healthy buyer pool in the next few months. Things to look out for in 2007 that will cause the housing market to retreat:
1. Weaker Economic Data Showing Weakness in Jobs & Wages
2. Lenders Tightening Loan Restrictions & Ease of Borrowing Ending Years of Credit Giveaways
These are the two biggest threats to housing's future and will occur if the bond market is right in predicting a recession in late 2007 or 2008. But for now, the stock market is getting the headlines as equities bet on a soft landing! So, who's right!
