Housing on Balance Better but Still Not Much Progress
On the housing front, prices and pending home sales both increased and did better than expected, while new home sales disappointed and continued to trudge along the bottom. The reports seemed to suggest that the housing market continues to disappoint both the bulls and the bears--failing to move into full collapse mode but not showing any signs of an upside breakout, either. This far into the year, it looks like we'll have to wait until 2012 to see much of a contribution to the economy from the housing industry. Eric Landry, our housing analyst, summed up last week's reports:
Case-Shiller released a second consecutive sequential gain, with more likely to come.
May home prices in the Case-Shiller 10- and 20-city indexes increased 1.1% and 1%, respectively, from April. Seasonally adjusted, the 10-city index enjoyed a 0.15% increase, while the 20-city index declined a miniscule 0.05%. At the same time, April results were restated to show roughly 0.4% seasonally adjusted increases for both indexes. The takeaway is that prices are undoubtedly stabilising in many regions. As we've been saying for a couple of months now, the housing market is currently in the midst of a pretty respectable seasonal upward trend. The current Case-Shiller sequential gains were strongly suggested from our real-time listing data. Based upon this loose relationship, we'd expect June sequential gains (not seasonally adjusted) to be of the same magnitude or stronger than those just reported, with July gains softening a bit but still remaining above well above zero.
New home sales remain depressed, with inventory at record lows.
June sales of newly constructed homes decreased slightly from May levels to a seasonally adjusted annual rate (SAAR) of 312,000 units. Declines were most pronounced in the Northeast and West regions, with the former suffering a 16% drop and the latter a 13% decline. The Midwest was up 10%, and the South was up 3%. New home sales remain at incredibly depressed levels, well below any historical trough going back to the early 1960s. The likely long-term path is almost assuredly toward higher new home sales--the question is when. With the spring selling season wrapping up, it's looking like 2010 will be the third consecutive year with sub-400,000 new home sales. The inventory of new homes again set a record low, falling to 164,000 from 167,000 in May, and the month's supply decreased by 0.1 to 6.3 months at today's selling pace. We think next year could be one in which the market enjoys improving sales, as prices appear to be finding a bottom as we speak. The absence of rapidly falling prices is the first step in restoring a semblance of confidence in what for many is the largest investment of a lifetime. If, somehow prices could find some stability over the coming months, there's a chance 2012 and 2013 could enjoy higher unit production. We're not holding our breath, however, as today's housing market has been prone to disappoint at every turn.
Investors shouldn't get too excited about strong year-over-year pending home sales.
June contract signings for residential real estate sales increased 19.8% from last year and 2.4% from May. Both the South and West regions were up midsingle digits sequentially, while the Northeast was flat and the Midwest was down midsingle digits. Actual closings closely track pending sales with a month or two lag, so investors can expect decent annual growth when July existing home sales are released next month, provided the correlations hold up. The problem, however, is that last year's pending home sales were heavily impacted by the expiration of the tax credit, making for extremely easy comparisons. As a result, investors should probably look for July existing home sales once again to be in the mid- to high-four-million range.
Coming Up: Employment Numbers Cap a Data-Filled Week
After last month's disastrous employment report, the market will be holding its collective breath for this week's employment report. Recall that June's reportshowed growth of just 18,000 jobs, while the consensus for July is for job growth of about 85,000 better but still below average population growth.
Seasonal adjustments, which were a huge negative in June, will provide a bit of a tailwind for the July report. Modestly lower initial claims for early July also suggest an improving employment report, although last week's highly positive claims number came too late to help the July figures. The restart of the auto industry also may come too late to help much.
On the positive side, hot weather and storm-related repair work could help boost the employment data. Our staffing companies analyst, Vishnu Lekraj, also indicated that their business was the strongest in June compared with the other months of the quarter, and the last few weeks have been even stronger. Based on these factors, I believe we might be able to crack six-figure job growth for July, besting the consensus. If not July, then the data should be looking better by August.
PMI Data Could Disappoint
While I'm not watching manufacturing that closely right now, the market is. Last month the Purchasing Managers Index, provided by the Institute of Supply Management, came in stronger than expected. While the consensus is for the PMI to improve to 53.7 from 53.3, I think a decline is a more likely scenario given that a fair number of manufacturers have reported disappointing earnings and that the auto industry was out of commission for a good part of the month. The Chicago regional PMI was also down, albeit modestly, on Friday. I am not looking for a collapse here, but a move to 52 might be in the cards.
Auto Sales Up at Last?
Japanese supply-chain issues have limited the supply of Japanese cars in the U.S. for several months. Sales that had been running consistently at 13 million units dropped to 11.5 million units last month (seasonally adjusted annual rate). Short supply and the resulting price increases hit auto sales hard. This month the consensus is for a small rebound to 11.8 million units. I imagine unit sales won't increase much until supply completely recovers (potentially as early as August), prices come down, and incentives go up.
