| Key Indicator Summary - Stock Market Reality Check |
| Written by Jonathan Dienhart | |
| 11.20.2009 | |
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A sharp drop in housing starts and building permits raised further concerns about a recovery in the housing market, spurring a three day sell-off in equity markets. The plunge in building activity, however, was likely partially attributable to the anticipated expiration of the original federal homebuyer tax credit at the end of November. The tax credit has since been extended and expanded to include existing primary homeowners as well. Though financial markets viewed the figures with pessimism, starts and permits are a measure of supply only. While it may not be encouraging to see supply so low, it’s not an entirely bad thing to have these levels remain subdued until sales activity improves more substantially. Adding additional units to the market not supported by demand would only result in further price declines. Data released from the Mortgage Bankers Association also raised further doubt over the housing recovery. The trade group announced that its seasonally-adjusted purchase index fell to its lowest levels since November 1997 which suggests that home sales activity may have dropped off in recent weeks. In a separate report, they also said that more than 14% of homeowners with a mortgage could be in danger of foreclosure at the end of September. Rising foreclosures will continue to be an impediment for a housing recovery while putting downward pressure on home prices. Major stock indices have now declined for three consecutive days after reaching their highest levels in over a year earlier this week. The S&P 500 index closed above the 1,100 level on Monday for the first time since October 2, 2008. Since then, weaker housing data and earnings disappointments have weighed on stocks. Enthusiasm over an early recovery may have gotten ahead of itself and any news that suggests the pace of recovery is lagging gives investors a reason to get out of a stock market that has seen a huge rally this year. Statements from European Central Bank President Jean-Claude Trichet on Friday suggested that less government support would be provided to fuel a global economic recovery, a slight departure from the statements of the G20 finance ministers, who just a couple weeks ago suggested they would maintain their current plan to stimulate their respective economies with emergency support initiatives. Trichet said that the financial system needed to prove it could stand on its own without the ECB’s aide. There is some concern that the U.S. may follow the EU’s lead and start pulling liquidity support from the economy, but there has been little indication from the Federal Reserve and Treasury that any such action would happen soon. The Economy Leading Economic Indicators increased for the seventh consecutive month in October which further evidences that the economy has stabilized and suggests that conditions will continue to improve in the coming months. The leading index recorded a reading of 103.8 in October which is a 0.30 gain from September levels. This month’s increase was driven by a drop in initial unemployment claims and surging stock prices. Six out of the ten components recorded increases from September levels. The consumer price index increased in October pushed higher by rising energy and transportation costs although inflation on the consumer level remains well-contained. The consumer price index increased 0.3% from the previous month on a seasonally-adjusted basis while the Core-CPI increased a seasonally-adjusted 0.2%. On an unadjusted basis, headline CPI fell 0.2% from its year ago levels while core CPI increased 1.7% year-over-year in October. The NAHB Housing Market Index in November remained unchanged from the previous month after posting its first monthly decline in October since June. The index remained at a reading of 17 which is the lowest it has been since July. Homebuilder confidence remained at low levels because most of the survey was conducted before the extension and expansion of the homebuyer tax credit was finalized. Homebuilder confidence should get a spark in the coming months from the new homebuyer tax credit. Housing Market Housing starts posted a sharp 10.6% in October while building permits fell 4.0% from the previous month. Housing starts fell to a seasonally-adjusted 529,000 units which is the lowest it has been since April. Single-family starts fell 6.8% to a seasonally-adjusted annual rate of 476,000 units while multi-family starts plunged 34.6% to 53,000 units. Total building permits fell to a seasonally-adjusted annual rate of 552,000 units with single-family issuances easing a slight 0.2% to 451,000 units. The drop in activity can be attributed to cautiousness around the expiration of the original homebuyer tax credit. The tax credit has since been extended and expanded which should spark an increase in starts and permits in the coming months. National average mortgage rates declined from the previous week to 4.83% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on November 19th. This is the third straight week that mortgage rates have declined and the lowest they have been since May. Fixed rates are now just slightly higher than its all-time low. In the week ending November 13th, the MBA’s seasonally-adjusted purchase index dropped 4.7% from the previous week and was down 15.36% compared to the same time last year. This is the sixth straight week that purchase applications have declined and the lowest the purchase index has been since November 1997. For market-level data and analysis please visit our website at http://www.hwmarketintelligence.com. For more detailed information on the indicators discussed in this key indicator alert, please visit the following links:
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