Existing Home Sales for the month of January walloped the market on Friday, though thanks to a thorough beat-down the day before by the weekly jobless claims report, stocks hung in. The Dow Jones Industrials Average closed up fractionally on the day and ended the week down only about 1%.
Existing Home Sales Wallop
Existing Home Sales wowed the market when reported Friday, but not in a good way. Sales of used properties ran at an annual pace of 5.05 million in January, down 7.2% from a revised 5.44 million pace in December. Helping to illustrate the significance of what is going on in real estate, we note that December's pace was also down sharply from November's rate of 6.49 million.
November marked the sales peak for the last twelve months, but unfortunately, it may have also struck an inflection point. I'm stressing "may" because I'm near certain that the First-Time Homebuyers Tax Credit drew a significant number of first-time homebuyers to enter into contract last summer through fall. Those sales closed in September, October and especially November. The unfortunate counter-effect to a non-recurring incentive, or to any incentive until it has exhausted its potential, is that those "pulled forward" sales end up absent in the months just after the conclusion of the special stimulus. Thus, I believe that a housing sales chart absent of stimulus effects would simply offer a smoother, though slower, rate of sales growth recovery than the current choppy mess. That said, the Chief Economist of the National Association of Realtors (NAR) smartly noted that the incentive serves as a critical crutch against the handicap of heavy distressed inventory flooding the market.
There's another, though less important, soothing factor impacting Friday's housing report. The weather started getting frightful in the important Northeast region in late December, and stayed that way through February. Still, these "existing home dealings" mark the closing of sales, whereas "Pending Home Sales" would better reflect weather related impact now, as people are not getting out to sign into contracts and to see homes. The NAR, however, noted that traffic was actually up, but the NAR is of course biased.
I suppose that weather might drive extensions of closing dates (you tell me), as that would seem to be a viable reason for such activity. I think it's more likely that weather impacts Northeast regional Existing Home Sales in March and April, when properties that would be entered into contract now might close. Anyway, the non-seasonally adjusted chart of existing home sales clearly shows a seasonal affect that is of course well-understood by market participants. That effect has the market reaching the trough of its annual cycle now. So, there is a spring fling to look forward to, especially given the latest tax incentive.
Another reason to be hopeful is the fact that the year-over-year sales pace improvement was 11.5%, but remember that we are talking about year-over-dreadful-year in this case. The comparable results are drastically easy to beat, given the troughs reached in the economic catastrophe we have traversed.
Still, prices continue to ease, but this is also symptomatic of market weakness. Yet, the price easing allows for market normalization. Foreclosures continue to purge, though a shadowy foreclosure overhang may still lurk to keep recovery reined in.
What's really working against real estate recovery is ongoing joblessness and under-employment. Thursday's killer news was that Weekly Initial Jobless Claims jumped back up to 496K. For as long as near 20% of the workforce is less than optimally employed, and 9.7% completely unemployed (plus the forgotten), then the economy is simply not going to recover in a robust fashion. The naysayers would remind us that hiring will occur as economic demand resumes, but we wonder if the depth of job losses and the length of lost income to households will act as a serious drag to recovery. It becomes both a lagging indicator and a leading one in such an instance, in my view.
Be careful not to get too excited by Friday's revision of fourth quarter GDP, to +5.9%, from 5.7%. Much of the gain came from decelerating inventory destocking. While I agree another quarter of inventory driven growth may be in store, I'm also looking for a dip back into contraction thereafter. Still, Moody's (NYSE: MCO) is likely right that the harsh winter should impact Q1 GDP, so we might see a return to weakness sooner rather than later. This is a trend consistent for periods just out of recession, and considering the depth of the latest dip, it seems even more likely this time around. This is especially the case thanks to the big labor market hole we need to dig ourselves out of.
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