The US economy is based largely on the consumer. Consumer confidence is strongly tied to asset valuations, so today’s news releases for the Mortgage Bankers’ Association’s purchase applications index and New Home Sales were fairly important to gauging the possible strength of the US economy. Many investors and homeowners are asking the questions: “Has housing bottomed?" and "Will the market go into a recession?” These two questions reflect the consumers' concern for their two greatest assets: their home and their retirement portfolio. So what are the news releases telling us?
The Mortgage Banker’s Association’s Purchase Index measures applications at mortgage lenders, a leading indicator for housing construction and home sales. The purchase index fell 10.6 percent to 390.2 last week, previously 436.5 the week before and 463.8 in the week ending December 8th. The trend in the last three weeks has been a decline in applications after a quick surge the first week of December from 426.6 to 463. The fall in applications could not have been attributed to a rise in rates because the 30-year fixed mortgage averaged around 6.12 percent, only up 2 basis points last week. Of those applications 48.8 percent were refinancings. The index has been tracking near 400, plus or minus 20 points, for nearly six months. Altogether, it looked like the spike in lending applications the first week of December was short-lived and not the sign of a bottom in housing.
More of a lagging indicator than the MBA’s purchase index, new home sales in the US rose 3.4 percent in November. Two other notes in the announcement were rather important, the supply of unsold homes fell down to 6.3 months' worth from 6.7 months' worth in October and the median price for a new home rose 5.8 percent to $251,700 from $237,900 a year ago. Because supply had fallen in November, the median price rose.
The fall in mortgage rates since July has helped to stem the 30-percent drop in new home sales over the past year and a half, but data from the MBA’s purchase index shows us that the current bottom may be short-lived.
The stock market enjoyed the news with the Dow Jones Industrials up 102.94 points to 12,510.57, the Nasdaq Composite up 17.71 points to 2431.22, and the S&P 500 up 9.94 points to 1426.84 for the day. The news helped spark buying even in the Dow Jones Transportation Index, up 51.10 points to 4591.86, which has been suffering from the absence of a peak season. The American Trucking Association said that the decline was the largest year-over-year decrease since 2001. Two of the main factors going into a slim season for truckers were better inventory management to prevent a balloon year-end shipment and many retailers kept their inventories small worrying over a slowing economy. The retailers were right to worry: the year-over-year store sales number was also released today for last week’s results, only up 1.7 percent, the lowest rate in almost two years.
The holiday season of consumption is over, and it could have been better. Past new home sales have helped to spark some buying in the market today, but lending applications are falling again and that indicates less buying and more housing inventory in the near future. To see continued strength in housing, we need to see growth in lending applications with a smaller percentage of refinancings. With too much supply and not enough demand, prices should continue to fall, yet a rebalancing may be already underway.
Looking at housing starts in a contrary fashion, we see that they have been on a decline since January and have recently risen (up 6.7 percent in November). Demand is starting to find some life as noted in the drop in unsold supply of homes, and we can see that housing starts are pulling back to prevent too much inventory. Housing may yet have the soft landing the market has been hoping for.
