Equities continued to trend lower due to weaker than expected June employment data and a more cautious outlook for the U.S. economy. The broader S&P 500 index finished almost 2% lower on Tuesday which is its lowest close in almost 10 weeks. Although crude prices and stocks have run-up nicely from the March lows, the market has settled down and has taken a much more guarded approach in recent weeks. Attention will now turn to earnings as Alcoa will kick off second quarter earnings season on Wednesday.

Pending home sales in May indicated some stabilization in the housing market driven by higher affordability and the government’s homebuyer tax credit. Although the pending home sales index only increased 0.1% from an upwardly revised April figure, it was the fourth straight month that the index has increased. It will be important to see if sales activity held up in June when figures are released later this month in spite of steadily rising mortgage rates over the past few weeks.

Rising unemployment continued to show its effects on consumers with the American Bankers Association reporting on Tuesday that loan delinquencies reached record levels in the first quarter. The rise in various delinquency categories sets off another concern that other forms of consumer debt unrelated to housing may be the next wall to crumble if the economy does not recover soon.

The Economy
The U.S. economy shed a weaker than expected 467,000 seasonally adjusted non-farm payrolls in June. Continued job losses pushed the nation’s unemployment rate up to 9.5% which is the highest it has been since August 1983. Non-seasonally adjusted total non-farm employment in June was 5,842,000 jobs lower than in June 2008. Currently, non-seasonally adjusted total non-farm employment shows a figure of 132,609,000, a loss of 4.22% from June 2008.

Final estimates for first quarter gross domestic product showed another dismal quarter for the U.S. economy but came in better than previous estimates had suggested. GDP estimates improved with every revision in the first quarter. After recording its worst contraction since the first quarter of 1982 in the final quarter of last year, the economy contracted 5.5% during the first quarter compared to 5.7% contraction in preliminary estimates and a 6.1% drop in advance estimates. This was the first time since 1975 that the economy has contracted for three consecutive quarters. Improvements in business spending and government spending along with bigger declines in imports helped to ease the pullback in economic performance during the first quarter.

Housing Market
National average mortgage rates declined from the previous week to 5.32% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on July 2nd. Mortgage rates this past week dropped back down to their lowest levels since the first week of June although rates have now remained above 5.0% for five straight weeks. In the week ending June 26th, the MBA’s seasonally-adjusted Purchase Index dropped to 267.7 from 280.3 in the previous week. This is the highest the purchase index has been since the week ending April 4th. The latest figure reflects a 4.5% decrease from last week and a 21.91% drop from the same period last year. Rising mortgage rates caused refinance activity to plunge while purchase activity also slowed leading to a drop in overall mortgage application activity last week.

Both new and existing home prices posted gains in May while existing home sales continued to rebound but new home sales eased slightly. Improvements in both inventory and pricing for the new and existing home markets in May are positive signs for a housing recovery.

New home sales eased a slight 0.6% in May to a seasonally adjusted 342,000 homes from a downwardly revised April figure of 344,000. Sales for the previous three months were also revised lower by 32,000 units. In May, new home inventories declined to 289,000 from an April figure of 298,000 on a non-seasonally adjusted basis. Non-seasonally adjusted units of unsold inventory have not recorded a monthly increase since May 2007 and are now at their lowest levels since April 2001 as builders continue to scale back building activity. There are now 10.2 months of supply on a seasonally-adjusted basis based on the current sales pace which is the lowest it has been since July 2008. In May, median new home prices increased to $221,600 from a revised April figure of $212,600. Median new home prices increased 4.2% from last month but are still down 3.4% from the same year-ago period. Rising rates and prices pushed new home affordability down for the second straight month in May after hitting an all-time high in March.

Annualized sales of total existing homes in May increased 2.4% from April levels to 4.770 million units. This was the first time since January-February 2007 that existing home sales have posted consecutive month-over-month gains. Sales of existing homes are still down 3.6% from the 4.950 million units in May 2008. Median existing home prices in May increased to $173,000 from $166,600 in April. This is the highest median existing home prices have been since December. Existing home inventory declined from the previous month as lower prices helped to spur buying activity and reduce the number of homes for sale. Inventory of existing homes declined 3.53 percent to a preliminary 3,798,000 units from 3,937,000 units in April. At the current sales pace, there are 9.6 months of supply of existing homes on the market. Months of existing home inventory are back to the lowest they have been this year.

For market-level data and analysis please visit Hanley Wood Market Intelligence. For more detailed information on the indicators discussed in this key indicator alert, please visit the following links: