By Carlos Guillen
Equity markets are shaking within a narrow band so far during this last day of the trading week, a day after the NASDAQ halted trading as a result of a technical glitch, which still has not been honed-in. Perhaps stocks could have been much deeper in the Green; however, worse than expected housing data has put pressure equity prices.
Just two days after we got a glimpse into the state of the housing market, which looked favorable with sales of previously owned homes rising to their highest level in close to four years and better than expected, today the view into the housing market looked quite different. In fact, according to the U.S. Census Bureau, new home sales during July increased year-over-year by 6.8 percent and decreased month-over-month by 13.4 percent to 394,000 (annualized), landing much lower than the Street's consensus estimate of 485,000. Given that new home sales tends to be more a leading indicator than sales of previously owned homes, today's housing results may be indicating rising mortgage rates are now beginning to make home buyers more reluctant to buy new homes; more on this below.
Investors are also paying attention to any comments that may come out from the Fed conference in Jackson Hole, Wyoming. It should be noted that there would have been a much stronger focus on this event today; however, Fed Chairman Ben Bernanke skipped out on the event, as well as leaders of the European Central Bank and the Bank of England. Nonetheless investors are paying attention and have heard rather mixed comments in CNBC interviews earlier today, with Atlanta Fed Bank President Dennis Lockhart backing a September reduction in bond purchases with a caveat, and St. Louis Fed President James Bullard saying there's no reason to start tapering any time soon. Also in discussion in Jackson Hole will be who take over Bernanke's place, Larry Summers or Fed Vice Chair Janet Yellen?
In all, stocks remain slightly in winning territory with the Dow Jones Industrial Average up over 20 points despite poor housing results and ambivalent taper talk. On a last note, it was rather encouraging to see that chaos did not break out yesterday after the NASDAQ experienced its glitch and actually ended the session in the green, perhaps an indication that investors have more confidence on the automated system than many thought.
Home Sales Take a Hit
By David Urani
New home sales for July came in today, and it was quite the surprise. Sales reportedly crashed by 13% month to month to 394k annually adjusted, from 455k previously. That was a far cry from the 487k consensus as well. Looking at it regionally, the weakness was seen all around. In the meantime, inventory rose by 4% to 171k.
To begin with, a sales deceleration was something most everyone has been bracing for and in a way seeing them fall was always going to be understandable with the rising mortgage rates. However, the magnitude is alarming. I will say that this home sales data tends to be volatile, especially so considering it is annually adjusted so it may take a couple more months to understand the true trend here. Nevertheless, this is a sobering report.
Interestingly, this result comes shortly after the NAHB's report for August homebuilder confidence which is apparently still sky-high. The HMI index had hit 59, the highest point since 2005. That said, single-family housing starts as reported by the Census had been slowly meandering lower and could have projected some of this sales softness.
So then, perhaps the builders saw this coming to an extent, but at the same time they remained as confident as ever. It's always popular to say that the NAHB likes to put a rose-colored lens over their analysis which is plausible, yet you wouldn't expect them to be too outrageously out of line, especially considering that over time (below) the HMI has generally trended with starts and sales. It's likely that homebuilders on the ground level are seeing things from a long term point of view.
Clearly all the volatility surrounding interest rates and the Fed is disrupting the market in the immediate term. However, in the grand scheme we may look back at this as a hiccup as rates readjust. In the long term, home sales are still less than a third of peak levels and have plenty of lost ground still to recover (even if a lot of it was a bubble). Also note that new home sales, which currently stand at a 394k annual rate, had gone past 1,300k in 2005 with a 30-year rate above 6% whereas rates are running around 4.5% now. Likewise inventories remain quite low by historical standards.
The sour home sales report has housing stocks (as measured by the Dow Jones US Home Construction Index) down 3% this afternoon. Yet, it's not nearly as bad a panic as one may have expected considering how skittish the market has been over housing stocks lately. One item of note is a spike in gold prices on the release of the housing data at 10:00am. We all know the Fed is at a crossroads right now, deciding whether or not to start to taper off their QE program next month. And we also know housing is a major point of interest for the Fed. So seeing today's sales data, perhaps the market is now wondering if the Fed has the guts to step off the gas.