Financial markets have been a scary place of late, the bullish sentiment driving the market rebound since March seems to have subsided as we head into the final two months of the year. As each economic indicator sheds additional light on the pace of economic recovery (or lack thereof), there has been a furious level of data dissection to determine whether the headline conclusions of each news release really speak to economic growth (the treat) or are perhaps concealing evidence of continued weakness (the trick).

Stocks plunged on Friday as doubts cast over the possibility of a sustained longer term recovery. Equity markets appear to lack the momentum to move substantially higher, especially with many institutional investors looking to lock in profits before the end of the year. The broader S&P 500 index ended the trading day down 2.8% at 1,036. The S&P has now dropped back down to trade at its lowest levels since the beginning of the month and is on pace to lose about 2% for the month of October.

Stocks gave back all of Thursday’s gains which was fueled by a strong GDP report that showed the economy expanding at its fastest clip in two years. Yesterday’s report was especially positive because it was the first time that housing actually contributed to growth since 2005. Residential investments jumped 23.4% in the third quarter which helped gross private domestic investment increase 11.5% in the quarter. Optimism was somewhat tempered by the growth in part being fueled by the Cash for Clunkers program that has since expired, and the residential spending increase was coming off historically low levels.

New home sales eased in September which is likely a result of the upcoming homebuyer tax credit expiration at the end of November. We had expected to see one more month of increase as potential homebuyers rushed to take advantage of the credit, but apparently there was either the sentiment that they would not likely close in time to qualify for the tax credit, especially if the new home had not yet finished construction. An increase in sales in the existing home market lends some credibility to this notion, as it saw activity pick up significantly as buyers there would assumably still be able to close before the expiration date as construction time would not be a factor. The uptick in activity and rising share of first time home buyers in the market place have prompted industry associations to declare it to be an effective stimulus that should be extended and broadened to assist the housing market next year. Final word on an extension of the homebuyer tax credit is expected as soon as next week.


The Economy
Advance estimates for third quarter gross domestic product showed the economy rebounding to expand at its quickest pace in two years. Gross domestic product increased 3.5% in the advance third quarter report which is better than the 0.7% decline reported for the second quarter. GDP declined for four consecutive quarters before rebounding in the third quarter which was driven by government stimulus funds and a rebound in housing. A pick-up in consumer and business spending along with a jump in export activity helped offset an increase in imports and slower government spending in the third quarter.

The consumer confidence index fell to a reading of 47.7 in October from a revised September figure of 53.4. This is the second straight month that the index has declined and the lowest it has been since July. However, the consumer confidence index is up from its levels this time last year when the index stood at 38.8. The present situation index dropped from the previous month to a reading of 20.7 from 23.0 last month. The present situation index is now back to its lowest levels since February 1983. The expectations index declined to 65.7 from 73.7 in the previous month. The expectations index fell to its lowest levels since July.

In September, personal incomes in the United States declined just slightly from the previous month to $11,962.0 billion compared to $11,962.1 billion in August. Personal incomes are down 2.8% from $12,306.6 billion in September of last year. This month marks the ninth consecutive month of annualized personal income declines.


Housing Market
New and existing home sales moved in separate directions in September. Demand for resales remained strong as homebuyers were still able to take advantage of the homebuyer tax credit before it expires which buyers in the new home market would likely not be able to close before Nov. 30 unless they were purchasing a completed standing spec. home.

New home sales in September posted their first monthly decline since March. After five consecutive months of increases, seasonally-adjusted new home sales declined 3.6% from the previous month to an annual rate of 402,000 units. New home sales for the previous three months were also revised lower by 26,000 units. In September, median new home prices increased to $204,800 from an upwardly revised figure of $199,900 in August. Median new home prices are up 2.5% from last month but are 9.1% lower than the same year-ago period.

In September, new home inventories declined to 253,000 from an August figure of 261,000 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. Seasonally-adjusted inventory of unsold homes have declined for 29 straight months to 251,000 units. Months of new home inventory remained at their lowest levels since January 2007 because of the drop in the number of new homes for sale. Seasonally-adjusted months of inventory remained unchanged from the previous month at 7.5 months of supply on a seasonally-adjusted basis.

Existing home sales in September jumped 9.4% from the previous month due to lower mortgage rates and a last minute surge to take advantage of the homebuyer tax credit. Annualized sales of total existing homes in September rose to 5.570 million units which is also 9.2% higher than the 5.100 million units in September of last year. Existing single-family home sales increased 9.4% from last month to 4,890,000 units while condo and co-op sales were up 9.7% from August to 680,000 units. Median existing home prices in September declined to $174,900 from $177,300 in August. Median existing home prices have now declined for three straight months and are back to their lowest levels since May.

Existing home inventory posted is second consecutive monthly decline in September. Inventory of existing homes dropped 7.49% to a preliminary 3,630,000 units from 3,924,000 units in August. Months of existing home inventory dropped significantly due to a jump in sales activity along with the drawdown in units for sale. At the current sales pace, there are 7.8 months of supply of existing homes on the market compared to 9.3 months in August. Months of existing home inventory have not recorded an increase since April and are now at their lowest levels since March 2007.

National average mortgage rates increased from the previous week to 5.03% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on October 29th. This is the third straight week that rates have increased and the highest they have been since September. In the week ending October 23rd, the MBA’s seasonally-adjusted purchase index dropped 5.2% from the previous week and was down 16.03% compared to the same time last year. This is the third straight week that purchase applications have declined and the lowest it has been since mid-May.