Economic Report Summary: Housing Market Getting Worse, Not Better

Rising prices and sluggish income growth along with soaring initial jobless claims highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index up 2.9 percent to 1,296 (for a year-to-date total return of –10.9 percent) and the yield of the 10-year U.S. Treasury note fell 3 basis points to 3.94 percent.

Personal Income/Spending: Aided by $28 billion in government stimulus checks, personal income rose just 0.1 percent in June after a downwardly revised surge of 1.8 percent in May when almost twice as much government money was distributed. Overall spending rose 0.6 percent in June after a gain of 0.8 percent in May led by a 1.3 percent increase in nondurable items, a category that was dominated by increased spending on gasoline. Amid an increasingly weak labor market and meager wage gains, the effects of the government stimulus money are quickly wearing off.

Rising inflation, the worst since Hurricane Katrina, was probably the most significant element of this report as the overall PCE price index posted a gain of 0.8 percent in June following an increase of 0.5 percent in May. On a year-over-year basis, overall inflation rose 4.1 percent, up from an annual rate of 3.5 percent the month prior.

ISM Nonmanufacturing Index: The overall ISM nonmanufacturing index rose modestly, from 48.2 in June to 49.5 in July, remaining below the 50 mark separating expansion from contraction for the fifth month in the last seven. In a bad sign for the second-half of the year (and consistent with last week's plunge in new orders for the ISM manufacturing index), new orders fell from 48.7 to 47.9, the lowest reading since January when the overall index registered just 41.9. Recall that this January reading of the ISM nonmanufacturing index shocked financial markets at the time.

Pending Home Sales: The number of existing homes entering the purchase contract stage during June rose 5.3 percent after a downwardly revised decline of 4.9 percent in May. One-third of all home resales are now distressed properties (either short sales or bank owned properties) and many of them are in former housing bubble hotspots such as Sacramento and Las Vegas where bargain hunters have seen prices fall precipitously. On a year-over-year basis, pending home sales are down 12.3 percent, a much more statistically important figure than the month-to-month change.

As discussed on many occasions over the last six months, while a bottom may be forming for home sales, it is home prices that are the key for the economy and home prices will continue to fall until the inventory overhang is reduced sharply or sales pick up dramatically. Current sales levels would have to double or inventory would have to be reduced by half to bring supply and demand back into balance.

Initial Jobless Claims: The Labor Department reported initial jobless claims rose by 7,000 last week, reaching a new high for the current cycle at 455,000, following the prior week's surge to 448,000.

These are the first back-to-back readings in the 450,000 range since April of 2003 and the highest single reading since March of 2002. The four-week average reached a five year high of 419,500.

Extended unemployment benefits, signed into law two months ago, have resulted in previously laid-off workers once again being eligible to apply for benefits and this is clearly helping to push recent claims higher. The Labor Department said it is not able to determine the extent of this impact but that it should fade over the next month.

Continuing claims rose 31,000 to 3.31 million during the week of July 26th (continuing claims lag initial claims by a week) reaching their highest level since October of 2003.

There is little good news coming from the labor market and it will likely get worse before it gets better as more lay-offs in the financial and construction industries along with state and local governments show up in the jobs data. More than a half million additional jobs are expected to be lost in the second half of the year and the unemployment rate is expected to soar next year to 6.5 percent.

Summary: Rising inflation, meager wage gains, and a weaker labor market were all on display again last week as good news is increasingly hard to come by - the prior week's stimulus-induced surge in real GDP and the welcomed narrowing of the trade gap due to rising exports just about sum up all the good economic news for the year so far.

Despite the eternal optimism of the National Association of Realtors, the housing market is getting worse, not better. This trend is likely to continue for some time to come despite upbeat projections on home sales which, even if they do materialize, will do little to stop home prices from falling unless foreclosures subside.

Next week's report on retails sales will shed more light on how the consumer is holding up and the latest inflation data may show energy prices peaking with other sectors just beginning to show the pass-through effects of higher oil prices.

The Week Ahead: The coming week will be highlighted by reports on retail sales on Wednesday and consumer prices on Thursday. Also scheduled for release are reports on international trade on Tuesday, import/export prices on Wednesday, and four reports on Friday - industrial production, consumer sentiment, international data flows, and the New York area manufacturing index.

Comments

[investor88:]

Good analysis on the current situation. Whilst the dollar may rally and with it the stock market, this article would suggest that this is not likely to be sustainable rally.

2008 Aug 10 08:47 AM

[gabe borens...:]

The most important issue is that the home sales are rising.Surely they include distressed property ,but that is part of the consolidation process .As the distressed propert recirculates (sold) , we will see a gradual price rise by the fourth quarter of this year.
The current consolidation in the stock market ,leading to a major rally in the period ahead ,will drastically improve real estate activity.
Unemployment?-that is a lagging indicator and it is irrelevant to the rebound ahead.
There are positive signs all around but allowance needs to be made for the monetary lag . One more ease on the magnitude of 75bps to 100 bps ,could be the necessary catalyst to jumpstart psychology.
Either way we are on the way to recovery.
The worse for the FNMA and FRE appears to be over
even if the last week's losses were unsettling.
I could not help but notice the incredible results reported by the MBIA ,which had reported a $7.14 per share profit (!.7 billon) using GAAP standards .This is the same company that was declared bankrupt by a Hedge Fund using a "I am short the stock principle".This dramatic improvement is likely to continue in the bond insurance business.FNMA and FRA should be on the way to a profitable quarter by the early 2009 and yes the housing sector will look much better then.The time for the pessimism was a year ago (I was and had tried to warn investors via media).
Now that all of the issues are identified and are being addressed the dollar assets look cheap with the housing market offereing the most relative value.

2008 Aug 10 09:15 AM

[CLH:]

gabe---I agree with you. When the economy is worst is when the market starts up. The market looks at the future.

2008 Aug 10 09:26 AM

[Steve0:]

I live in California the distressed home sales State you mention The bank owned and short sales are going like hotcakes. A house I was going to place a offer had over 20 offers above the asking price. If you go back to the house price for the home in 2002 the asking price now at our higher. I say housing has hit bottom and you are looking at lagging indicators

2008 Aug 10 10:21 AM

[ArnoldCountry:]

gabe and steve... I could not disagree with you more. The problems in the housing sector are accelerating, not improving. By first quarter of 2009 you will see foreclosures double of what they are today. I am in the Sacramento area and just on my court, where homes were in the 700k range, two REO's priced in the low 300's and no interest. A few blocks away in a development built in 2006 of roughly 60 homes, 14 are REO's and only 3 of those 14 have even been put on the market. I am in the biz of sorts, I handle litigation for consumers against lenders and I can assure you, the litigation cycle of this has truly just begun. I am working on a article for here that I hope to get published that addresses how property investors can use a Chapter 11 bankrupcty to cram down on lenders on their investment properties. Now that the downward curve on values is somewhat declining, using the cram down provisions of Section 506 of the Bankruptcy Code can essentially wipe out all of the debt above the value of the property. For example, if an investor owes 400k on a property that is now worth 200k, they can in a bankruptcy proceeding modify the loan from 400k to 200k and get a payment accordingly. That will dramatically wipe out loan value for lenders, improve cash flow for investors and maybe start to take more inventory off the market as investors hold onto property that is cash flowing. Why lose the property when you can cram down. Anyone that thinks we hit bottom and then property immediately starts increasing in value is dreaming. Historically, that has never happened, they remain flat for approximately 2 years.

Finally, the credit crunch is alive and well and resetting option arms are just now getting full steam ahead. If you think things were bad before, they are about to get a whole lot worse. Lets mark this date and reflect on it again in February. Absent the Federal government declaring a state of national emergency in the economy and suspending all foreclosures, litigation and bankrupcy laws, it will get very ugly!

2008 Aug 10 12:38 PM

[Tesa:]

The housing market will go through many more years of false optimism before it bottoms out and that would be when people fail to look for profit and recovery in real estate market and obviously many are still seeking to profit from this which means the end is not near.

2008 Aug 10 01:57 PM

[mike mohr:]

This is the most stupid article I have seen on housing.
I noticed that four houses were sold in my neighborhood in past three weeks after sitting in the market for over six months.

2008 Aug 10 03:19 PM

[techy:]

gabe...

so you are saying we are out of woods......not so fast...

housing is still not affordable in most places, mortgage rates have gone up, and maybe we will need 20% downpayment to get a mortgage.

the market rally was due to oil/commodity going down and dollar flowing in to usa from abroad.....its just a reversal of short dollar trade.

it may last for a while...maybe 5-10% in broad market, but we are still not done with problems in the financials/credit markets.

but inflation going down is definitely a positive sign for the economy.

2008 Aug 10 03:33 PM

[techy:]

forgot to add that the rally may have been mostly short covering...

2008 Aug 10 03:35 PM

[Umm, yeah:]

@gabe

It's highly misleading to say that home sales are rising. They rose because more people buy houses in June than May traditionally. It's equivalent to freaking out that retail purchases are lower in January than December.

Look at the Year-over-Year numbers. They're down 12% from June last year. Sales are not picking up yet. Give it more time.

2008 Aug 10 08:23 PM

[LiquidSoapD...:]

Mike Mohr, your comment is that this article is stupid because four houses in your neighborhood sold? Wow, now that's a scientific analysis.

Several articles in last weeks WSJ pointed to still higher rates of foreclosures in the coming years, which obviously puts downward pressure on housing prices. While every location will bottom at different times, and their may be flurry's of price movement between the top and the bottom, I agree that overall, the prices of homes have yet to reach their nadir.
And to prove it to Mike, two homes on my block that have been on sale forever just lowered their prices again.

2008 Aug 11 09:43 AM

[neeb??:]

Up here in London, ON we seem to be in a lalaland scenario as housing prices are quite stable if not going up 1.5%. We even have more buyers... and yes I even saw an ad for no doc, no down payment mortgages. Maybe this is all a flashback, who knows....

2008 Aug 11 10:56 AM

[sickofthehype:]

Credit crunch round #2 coming up and will freak out people once again, so I think skittishness will continue for another year. Prime ARM resets/ Alt-A resets will have 750-FICO buyers walking away from properties, adding to the issues at hand. Not out of the woods yet, but for those looking to profit the time might be during the next 12-18 months. That's when some true bargains can be had.

2008 Aug 11 11:24 AM

[Kunst:]

The problem in the next housing round will be rising mortgage rates, which will flatten demand once again.

2008 Aug 11 11:57 PM

[MiamiCondof...:]

I detail the Miami crash on my blog, www.miamicondoforum.co... . Read some of my posts and tell me if you think we're out of the woods. I think the fun is just beginning. Foreclosures are being sold (below market) however they are still overpriced. These recent buyers will walk away from these purchases once they realize that they are not a vulture, but just another carcass. This process takes years and years. Housing crashes are never V-shaped. What makes you think the worst housing crash in history will just rebound? If you like doom and gloom, we've got plenty to spare here in South Florida.

2008 Aug 12 01:32 PM