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Dismal Home Data Might Not Be as Gloomy as First Thought

Wednesday, 25 July 2012 12:46 PM

INDICATOR: June New Home Sales

KEY DATA: Sales: down 8.4 percent; Median Prices (Year-over-Year): down 3.2 percent

IN A NUTSHELL: “Home sales are bouncing around but the trend remains up.”

WHAT IT MEANS: I have been touting the housing market as the next leading light in the economy. Well, sometimes you have to take one step back to move two steps forward and that may have happened in June.

New home sales fell sharply. That was not expected. But as usual, the details may not really be as bad as they appear. First of all, sales of the previous three months were revised upward, with the May numbers increased by 3.5 percent while the April numbers were boosted by nearly 4.5 percent. Those are pretty substantial increases and point to a market that is moving upward.

So don’t be surprised if the June numbers also turn out to be a lot higher than initially estimated. Second, much of the drop in sales came in the Northeast.

If you believe the Census Bureau’s first round of guesses, new home purchases fell by a whopping and incomprehensible 60 percent in that part of the country. If you believe that, contact me immediately as I am selling shares in a bridge. Demand was down in the South as well while demand rose sharply in the Midwest and more moderately in the West.

Basically, the data can be volatile so let’s not get too worked up about one decline. Smoothing things out by looking at quarterly averages, second-quarter new home sales were up by nearly three percent from the first quarter and nearly 20 percent from second quarter 2011. That’s solid improvement.

Prices, however, did decline over the month and from last year.

Sales at the upper end of the market eased and that hurt. Inventory is still minimal so that should keep prices from falling further if, as expected, sales rebound.

MARKETS AND FED POLICY IMPLICATIONS: In a world where the only data that matter are today’s data, this is not a good report. Indeed, most of us expected sales to have risen, not fallen. Yet there is no reason to believe the market is weakening. The trend is still up and builders remain quite upbeat.

Indeed, it is hard to believe that the market is turning downward when the Home Builders’ Confidence Index jumped in July to its highest level in more than five years. Either developers are clueless or the data have yet to catch up with reality. I am on the side of the latter.

Still, investors don’t like to be surprised, especially on the downside so this report cannot help build confidence in the economy. But it is earnings season and once again, what businesses did will probably dominate short term movements in the market.

On Friday, second-quarter GDP will be released and that should bring the discussion back to the economic numbers. Unfortunately, that report will likely be viewed more through a political lens than an economic one.

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Wednesday, 25 July 2012 12:46 PM
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