Equity markets continue to trend higher as the S&P 500 closed trading on Wednesday at 1,028 - the highest it has been since October 6, 2008. Expectations for economic growth in the second half of the year are higher as new trickles of improved economic data become available. Both new and existing home sales posted their fourth consecutive month of gains in July which at least shows that the artificial drawdown in interest rates by Fed purchases of U.S. Treasuries along with the government’s homebuyer tax credit are bringing some consumers off the sidelines. Leading economic indicators also increased for the fourth consecutive month in July, which suggests that conditions should continue to improve in coming months.

However, the road to a complete recovery is far from clear. When the various incentives for home and auto purchases expire, the short-term surge in demand will likely fade in the face of a murky employment picture. While it is unlikely we will see the bottoms set in March again, the monetary policy decisions ahead for an exit plan away from the strategy of perpetually low interest rates and huge increases in money supply could be nearly as important as the decision to implement those strategies to begin with. Chairman Bernanke stated last week that “Although we have avoided the worst, difficult challenges still lie ahead,” suggesting that he too may see the challenges in reversing the flood of liquidity.

The Economy
The consumer confidence index increased in August following two straight months of declines. The index increased to a reading of 54.1 in August from a revised July figure of 47.4. Both component indexes also increased in August. The present situation index increased from the previous month to a reading of 24.9 from 23.3 last month. The expectations index increased to 73.5 from 63.4 in the previous month. The expectations index is now at its highest levels since December 2007 which shows consumers have a more positive outlook about the future.

Leading economic indicators posted gains for the fourth straight month in July. The leading index is now at its highest levels since June 2008. The leading index recorded a reading of 101.6 in July which is a 0.60 point gain from June levels. The index is up 3.0 points from its levels six months ago when it stood at 98.60 in January. This month's increase was driven by increasing stock prices and a large drop in initial unemployment claims.

Housing starts reported an unexpected drop in July while building permits also fell from the previous month. Total housing starts eased 1.0% in July as builders cutback on construction activity. However, the declines were due to a drop in multi-family activity while single-family starts increased 1.7% from June levels. Total building permits declined 1.8% from June although the story here is the same as it was with housing starts. The single-family segment continued to show strength by increasing 5.8% while multi-family permits fell over 25%.

The consumer price index in July showed virtually no inflationary price pressure on the consumer level due to falling food and energy prices. Consumer prices remained unchanged from the previous month on a seasonally-adjusted basis while core consumer prices increased 0.1% from June on a seasonally-adjusted basis. On an unadjusted basis, headline CPI fell 2.1% from its year ago levels while core CPI increased 1.5% year-over-year in June. This is the fifth straight month that headline consumer prices have recorded a year-over-year decline and the largest annual drop in prices since 1950. Core prices recorded its tamest annual increase since February 2004.

Housing Market
New home sales increased for the fourth consecutive month in July which further suggests that conditions in the housing market may finally be stabilizing. Seasonally-adjusted new home sales jumped 9.6% from the previous month to an annual rate of 433,000 units. This followed a 9.1% increase in new home sales just last month in June. New home sales for the previous three months were also revised higher by 34,000 units. The annual pace of new home sales is now at their highest levels since September. In July, median new home prices declined slightly to $210,100 from an upwardly revised price of $210,400 in June. Median new home prices are down 0.1% from last month and are 11.5% lower than the same year-ago period. Increased competition from the existing homes market, especially foreclosures and short sales, has caused median new home prices to fall back to their lowest levels since March. Median new home prices have now recorded seven straight months of year-over-year declines.

In July, new home inventories declined to 272,000 from a June figure of 281,000 on a non-seasonally adjusted basis. The number of new homes for sale continues to decline and have not recorded a monthly increase since May 2007. New home inventory, on a non-seasonally adjusted basis, is at its lowest levels in over 14 years. Seasonally-adjusted inventory of unsold homes have declined for 27 straight months to 271,000 units which is the lowest it has been since March 1993. Declining inventory levels pushed months of inventory back to its lowest levels since April 2007. Seasonally-adjusted months of inventory declined from last month to 7.5 months of supply on a seasonally-adjusted basis which is down from 8.5 months of inventory in June.

Existing home sales continued to rise in July buoyed by increased affordability and the homebuyer tax credit. Annualized sales of total existing homes in July jumped 7.2% from June levels to 5.24 million units. This was the first time since 2004 that existing home sales have posted four consecutive months of increases. Sales of existing homes are also up 5.0% from their year-ago levels of 4.99 million units which is the first time since February 2006 that existing home sales have not recorded an annual decline. Existing single-family home sales increased 6.5% from last month to 4,610,000 units while condo and co-op sales were up 12.5% from June to 630,000 units. Median existing home prices in July declined to $178,400 from $182,000 in June.

Existing home inventory increased from the previous month probably due to homes being relisted as activity has picked up with the expiration of the homebuyer tax credit approaching. Inventory of existing homes jumped 7.35 percent to a preliminary 4,091,000 units from 3,811,000 units in June. These are the highest levels of existing home inventory on the market since November. Months of existing home inventory remained unchanged from the previous month as the increase in inventory levels were offset by higher sales activity. At the current sales pace, there are 9.4 months of supply of existing homes on the market. Months of existing home inventory are now at their lowest levels since December.

National average mortgage rates dropped from the previous week to 5.12% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on August 20th. Rates are now back down to their lowest levels since the end of May after reaching their highest levels since early July last week. In the week ending August 21st, the MBA’s seasonally-adjusted purchase index increased 1.0% from the previous week but was still down 11.21% compared to the same time last year. This was the fourth straight week that purchase applications have increased and the highest the purchase index has been in seven weeks.

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