Appraisals and Tight Lending Standards Throttle Existing Home Sales
Existing home sales unexpectedly fell in July by 3.5% to 4.67 million units on an annual run rate basis. I had been thinking sales would actual grow this month based on pending home sales data, which have been positive over the past couple of months.
The National Association of Realtors attributes the discrepancy to the failure of clients to obtain mortgages after signing purchase agreements or the failure of properties to appraise at the agreed-upon prices. Either event can result in the cancellation of a contract, which occurred about 16% of the time over the last couple of months, well above the long-term average. Appraisals continue to come in below the prices agreed to by the interested parties. Overly cautious appraisals and the inclusion of foreclosed homes that sell at distressed prices certainly appear to be hurting the closing process. To editorialize for a moment, I wish the Federal Reserve would spend at least as much time solving the appraisal issue and overly tight lending standards as it does keeping interest rates so incredibly low.
I suppose the ray of good news in the report is that existing home sales were not a problem across the entire U.S. but instead largely confined to the West Coast. The relative growth rates by region are shown in the table below:
Often, an improvement in one of the regions bodes well for the other regions in the months ahead. That would be very good news. In the past I have pooh-poohed existing home sales data because they are not a direct input into the GDP calculation, merely recorded as an asset transfer. However, growth in brand new home sales is not going to happen until more of the existing home inventory is cleared. New home sales are included in the GDP calculation and are the key to new construction jobs. Exceptionally limited growth in construction jobs following severe job losses during the recession is what is holding back this recovery.
Indeed, housing starts fell to an anaemic 604,000 units again in July following a downwardly revised 614,000 the prior month. As long as that number remains mired in the 500,000-700,000 range, I wouldn't read too much into any slowing or acceleration. It is just noise in a volatile series. As I indicated above, it is going to be hard to get out of that range until existing home sales look up--or existing home inventories mysteriously collapse.
Initial Unemployment Claims Spook the Market--They Shouldn't
Initial unemployment claims are a highly volatile metric affected by large layoffs, processing delays, holidays, and seasonal adjustment factors. Weekly claims for the most recently reported week jumped a relatively modest 8,000 to 408,000 from the previous week. Pundits were quick to point that the figure was back above the magic 400,000 level, as if that jump was going to cause an immediate collapse in the economy. Trust me, there is nothing magic about 400,000, other than it's easy to remember.
The preferred method of analyzing the initial claims data is by looking at a four-week moving average. On this basis, initial claims fell to 402,500 from 406,000.The metric has been on a three-month downward trajectory from an interim high of 440,000 on May 14. Much like the industrial production figures, the most negative data were from this spring, with some improvement over the summer. Unfortunately, an increase in the Challenger Gray Job Cuts report and this morning's announcement of large (and quick) layoffs at Bank of America (BAC) will probably keep this metric from showing much improvement in the short term.
Inflation Back Up Again in July After June's Decline
The scariest number of the week was the robust 0.5% (6.0% annualized) CPI growth rate, which served to push consumer inflation-adjusted earnings into negative territory. That means less free cash to spend in stores. The Labor Department estimated that about half that increase was due to a quick backup in gasoline prices during July that quickly reversed itself again in August. Groceries and clothing (driven by higher cotton prices) were other key culprits in the negative report. Falling crop prices lately and a 25% drop in the price of cotton should help down the road, but unfortunately not for a few more months. Falling natural gas prices and transportation services prices as well as flat new car prices (after a run of five months of substantial increases) kept the report from being worse than it was. Unfortunately the large inflation increase will blow another hole in the third-quarter GDP reports, which are reported with a subtraction for inflation.
Consumers Punish the Price Boosters
The good news is that consumers are voting with their feet when prices get too high. Auto sales collapsed in May and June when prices were sky-high and then modestly rebounded in July when prices flattened out. Consumers ate out more when home grocery prices accelerated. And gasoline usage by consumers has been on a multiquarter decline as prices rose. Companies that raise prices too fast will be unpleasantly surprised. I suspect as consumption remains lacklustre, more consumer price cuts may be in the works. Potentially this is good news for the consumer, for retailers not so much.
This Week's List of Indicators Is Mercifully Short
Like last week's news, we are likely to see the good, the bad, and the ugly this week. Durable goods are expected to rise 2.3% mostly due to some good orders at Boeing that won't be completely stripped away by seasonal adjustments. Excluding the airline orders I wouldn't expect many gains. Still, a strong headline durable goods number combined with better shipments from Boeing should finally make the manufacturing sector look a little better. Other potential good news is the home price data out of the FHFA, which should show a small increase but probably not as large as the previous month's 0.4% gain. Still, I'll take anything I can get. The bad includes new home sales, which remain mired in the low 300,000s. The ugly will include a likely downgrade from the initial 1.3% second-quarter GDP growth reading reported last month to something less than 1.0% when reported on Friday. Lower net exports, adjusted downward in the interim, are the primary culprit for the likely reduction. Again, everyone and their brother know about the possible reduction, but never forget the shock value of a negative data point in a panicky market.
