FSU Editorial: "The Surge in Home Prices is Driven By Lower Prices" by Anthony Cherniawski 05/25/2007

THE SURGE IN HOME SALES IS DRIVEN BY LOWER PRICES.
by Anthony M. Cherniawski
The Practical Investor, LLC
May 25, 2007

New home sales in the U.S. unexpectedly surged in April by the most in 14 years, and analysts believe the hike was driven by the biggest decline in median home prices since 1970.

The headline in IndyStar.Com reads, “Home Sales Through the Roof” but only skimming the headlines doesn’t give you the true picture of what is really going on. What is not said in the article is that the 16.4% increase was month-over-month, up from the worst home sales month in decades. The year-over-year new home sales slumped 10.6% from April 2006, while home prices also dropped 10.9% from April 2006 and 11.1% from a month earlier. The year-over-year median price of a new home fell from $257,127 to $229,100.

David Seiders, chief economist for the National Association of Home Builders, said he was looking for sales of new homes to fall by 18 percent for the whole year, matching last year's decline.

Seiders said half of all builders report they are cutting prices; this comes on top of aggressive use of incentives such as free decks and kitchen upgrades in an effort to move homes. The inventory of unsold new homes fell slightly to 532,000 in April. It still would take six months to deplete this inventory at the April sales rate.

The upper crust aren’t suffering, yet.

If you own a home in the Hamptons, you are still doing very nicely, thank you. A founder of a mutual fund company just bought an ocean front property there for $103 million…and that doesn’t even include a house.

The Nikkei is losing steam again.

This morning the Nikkei index fell over 215 points to 17481 (not shown on chart). This means that it has fallen to an important technical support level just prior to the Memorial Day holiday. A lot can happen over a 3-day weekend, especially when the Japanese markets will be open on Monday. These are cautions times.

The bull is still in the China shop…

…And Alan Greenspan has a cattle prod. There was an immediate reaction to Greenspan’s speech. Asian stocks fell for the first time in four days after former Federal Reserve Chairman Alan Greenspan warned that Chinese equities face a ``dramatic contraction.''

That wasn’t enough to put the Shanghai index into a tailspin, but Elliott Wave analysis suggests only one more spike to the top should end the rally. Perilous times, indeed.

The dark side of the Dow…

What your eyes see is a reversal out of an ending diagonal pattern. (See the Elliott Wave description.) “In all cases they are found at termination points of larger patterns, indicating exhaustion of the larger movement.

“Unmatched by any run since the 1920s, the record streak of up-days in the DJIA following the March shakeout has been well publicized. What has received very little press is the other side – the dark side of this silvery orb.”

What’s happening to bonds, anyway?

Typically, as stocks contract, we often see bonds rally. This just doesn’t seem to be the case this time, and for a very important reason. There is no “risk premium” in bonds. That means the highest yield is in the money markets at 4.87 (3-month) to 4.96% (6-month), while 5-year notes only get 4.8% and 30-year bond yields are 5.01%. This sets the stage for bond prices to tumble even further, as investors demand higher yields for their fixed-income investments. The charts suggest much lower bond prices.

U.S. exiting home sales drop to a 4-year low.

While new homebuilders get the message, existing homeowners still haven’t caught on. Homebuilders are offering incentive packages as well as lower prices to get inventory off the shelves. Homeowners don’t have the moxie that the builders have, nor do they have a sales staff willing to aggressively negotiate deals. Even though existing home prices also dropped about 10%, there is now an even larger inventory of unsold homes – about 8.4 months.

The beginning of credibility for the Dollar.

The dollar is now at an important inflection point. Can it rise above its 50-day moving average? Or will it fall back to the trendline? The $64,000 question awaits an answer that will probably come after the Memorial Day holiday.

Investor appetite for gold sated?

Tokyo traders said sentiment for gold was bearish after large sales by central banks, while investors' appetite for gold exchange traded funds appeared to be slowing down.

So far since mid-April, the gold index has lost $35. The World Gold Council report for the first quarter 2007 claims that the demand for jewelry went up 17%, due to the celebration of the “year of the Golden Pig” in China. But net retail investment declined by 26% and central banks were heavy sellers.

Gasoline prices…are we there yet?

According to the Energy Information Agency, “For the fourth consecutive week, gasoline prices were up, increasing 11.5 cents to 321.8 cents per gallon as of May 21, 2007. Prices are 32.6 cents per gallon higher than this time last year and have now reached an all-time nominal high for the second week in a row.

” Refinery shutdowns and rising demand may keep costs climbing until the Labor Day holiday in early September, when U.S. gasoline purchases usually taper off. Could it happen sooner?

It’s make or break time for NatGas prices.

Last week I suggested, “Enough already!” Sure enough, prices turned down, but not enough to be definitive. Notice how some TV programs always make you wait until after the commercial break? This time we’ll have to wait an entire holiday weekend to see whether nat-ural gas prices have changed trend.

We are at the mercy of strangers.

The problem with experience, someone once said, is that it comes along only after you need it most. The American central bank has experience, but it’s not the one needing it. The Chinese central bank is now in the driver’s seat, and hasn’t yet had experience come along. It’s about as seasoned today as America’s Benjamin Strong-led Fed was just before 1929. More to the point, it’s not about to listen to the U.S. because we are a major part of the problem in other respects.

Thomas Au makes a valid correlation between our past history and China’s present. Although we have seen this movie before, there is a brand new cast of players who have no idea what the outcome will be. Déjà vu, anyone?

Disclaimer: It is not possible to invest directly into any index.

CONTACT INFORMATION
Anthony M. Cherniawski
President and CIO
The Practical Investor, LLC,
State Registered Investment Advisor
East Lansing, MI USA
Email

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.