Markets & Finance

Vital Signs: Housing Drag Won't Let Up


On tap: September figures on home sales and durable goods, October consumer sentiment, and more earnings reports

How low can housing go? Early this year it appeared as if conditions were settling down, but the situation has changed dramatically in the past six months. Indeed, its drag on the economy shows few signs of letting up. According to Federal Reserve Chairman Ben Bernanke in a speech on Oct. 15, "the further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year."

This week, the September figures for both new and existing homes are released, and the consensus view is that conditions kept deteriorating. Falling sales has led to a ballooning level of unsold homes on the market. In August, there were over eight months worth of unsold new homes available and 10 months worth of existing homes up for sale.

This building supply of homes will force home prices to keep falling and drive builders to rein in building activity even further. Making matters worse is that falling home prices could keep potential buyers on the sideline as they patiently wait for better deals, thus completing what is shaping up to be a vicious cycle in housing.

Conditions in the credit market, touched off by bad subprime mortgages, are also making it tougher for those who would like to buy a home. Credit standards have been raised and mortgage rates are above levels seen before the credit market turmoil.

A big concern among Fed officials and Wall Street economists is that the ongoing contraction in the residential market will erode consumer confidence and spending. While the popular gauges of confidence haven't tracked very well with actual spending of late, they do provide some measure of apprehension. After all, people aren't just dealing with a housing recession, but also elevated energy costs heading into winter, a softer job market, and the increased uncertainty over the health of the U.S. economy.

Here's the weekly economic calendar, from Action Economics.

Economic Reports

Report

Date

Time

For

Median Estimate

Last Period

Existing Home Sales (million, annual rate)

Wednesday, Oct. 24

10:00 a.m.

September

5.28

5.50

Durable Goods Orders

Thursday, Oct. 25

8:30 a.m.

September

1.4%

-4.9%

New Home Sales (million, annual rate)

Thursday, Oct. 25

10:00 a.m.

September

0.78

0.80

University of Michigan Consumer Sentiment Index (final)

Friday, Oct. 26

10:00 a.m.

October

82.0

82.0

MEETING OF NOTE

Monday, Oct. 22, 7:30 a.m. EDT - Federal Reserve Board Governor Randall Kroszner speaks at the Institute of International Bankers' annual breakfast Dialogue in Washington, D.C.

MEETINGS OF NOTE

Tuesday, Oct. 23, 10 a.m. EDT - Former Federal Reserve Chairman Alan Greenspan is the keynote speaker at the Midwest ACG Capital Connection conference in Chicago.

Tuesday, Oct. 23, 10 a.m. EDT - The Federal Reserve's Consumer Advisory Council meets to discuss the home Ownership and Equity Protection Act and the Truth in Lending Act.

ICSC-UBS STORE SALES - Tuesday, Oct. 23, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended Oct. 20. Sales bolted ahead 1% in the week ended Oct. 13, after holding steady for the two prior weeks. The yearly pace of rebounded to 2.5%, from 2.1%.

JOHNSON REDBOOK INDEX - Tuesday, Oct. 23, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the second week of September, ending Oct. 20. In the first week of October, sales were up 0.1% vs. the same period in September. Sales for the entire month of September were up 0.3%.

RICHMOND FED SURVEY - Tuesday, Oct. 23, 10 a.m. EDT

The Richmond Federal Reserve Bank issues its October survey of manufacturing activity. The seasonally adjusted composite index leaped to a 17-month high of 14 in September, from 7 in August and 4 in both July and June. Activity picked up quite a bit in September, as the shipments index jumped to 22, from 10 the month before. The new orders reading was 14, up considerably from 5 in August. The employment reading remained positive, although the reading indicated a small slowdown in hiring.

Expectations for the following six months were not as bright, with a shipments index level of 18, from 25 in each of the prior two periods. The long-term average is 33, indicating that respondents may be expecting activity to slow down some in the coming months. The new orders, employment and capital spending readings for September were also below their long-run averages.

MORTGAGE APPLICATIONS - Wednesday, Oct. 24, 7 a.m. EDT

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Oct 19. The purchase index rose to 429.1, from 420.2 in the prior period. The refi measure was 1980.9, from 2003.2 in the week ended Oct. 5.

The four-week moving average for the purchase index hit a 22-week low of 419.9, from 425.6 in the previous week. The refi index climbed to 1990.2, from 1985.5.

The average interest rate for a 30-year fixed-rate mortgage held steady at 6.4%. The rate has eased from a recent peak of 6.66% in July, but is still above the rates through May of this year.

EXISTING HOME SALES - Wednesday, Oct. 24, 10 a.m. EDT

Existing home sales in September are expected to keep tumbling. In August, the yearly pace of sales fell to 5.5 million, from 5.75 million in July, and an average of 5.92 million in the second quarter of 2007.

The deterioration in sales reaccelerated in August. Compared to a year ago, overall sales were off 12.8%, the steepest yearly decline since September of 2006. And both single-family and condo purchases dropped at a double-digit pace in August, a first for the condominium category since the end of last year.

What's more, people continue to put their homes on the market. That's lifting inventory levels and should exert more downward price pressures. The number of existing homes for sale rose to 4.58 million, from 4.56 million in July. That's enough to cover 10 months worth of sales at the August rate.

JOBLESS CLAIMS - Thursday, Oct. 25, 8:30 a.m. EDT

Jobless claims jumped to 337,000 in the week ended Oct. 13. In the prior period, initial claims eased to 309,000, from 320,000 for the week ended Sep. 29. The four-week moving average climbed to 316,500, from 310,500 for the week ended Sept. 29. Continuing jobless claims, which run a week behind the initial claims figures, rose to 2.53 million, from 2.52 million in the week ended Sept. 29.

DURABLE GOODS ORDERS - Thursday, Oct. 25, 8:30 a.m. EDT

Durable goods orders are expected to show a modest rebound in September. Back in August, orders tumbled 4.9%, although just about all of the decline could be accounted for by drops in motor vehicle and civilian aircraft orders. Outside of the volatile aircraft industry, a lot of the weakness in August appeared to be housing related. Construction machinery orders were off 32.4% after a big gain in July, and demand for furniture and appliances also declined.

There are signs that companies are pulling back on investment outlays as well. Striping out defense and volatile aircraft orders gives a good sense of business investment. Capital goods orders minus defense equipment and civilian aircraft were off 0.5% in August, albeit after a solid July gain of 0.9%. On a yearly basis, however, orders are falling -- down 1.4% in August.

NEW RESIDENTIAL SALES - Thursday, Oct. 25, 10 a.m. EDT

September new single-family homes sales are expected to keep declining. In August, sales ran at an annual pace of 795,000, from 867,000 in July. That was an 8.3% monthly drop and put the yearly decline at 21.2%. The number of homes for sale did manage to edge lower in August, with a level of 529,000, from 537,000 the month before. The decline was helped by the combination of drastically reduced building activity and sharp price cuts by many builders. Still, the number of unsold homes was large enough to cover over eight months worth of sales, the highest monthly supply of inventories since March.

With sales still falling, builders will likely have to slash building activity and trim prices even further. Reduced building activity will have ongoing negative effects on economic growth in the second half of the year. And more price concessions for new homes could depress prices for existing homes even further.

HELP-WANTED INDEX - Thursday, Oct. 25, 10 a.m. EDT

The Conference Board issues its September index of help-wanted ads, based on ads gathered from major newspapers across the nation. The index slumped to 23 in August, from 25 in July and 29 in August of 2006. Help-wanted ads declined in all nine U.S. regions during the three-month period ended in August. At the same time, the percentage of markets with rising want-ad volumes plummeted to 16% from 49% in July.

The Conference Board's tracking of September online job ads jumped 4% on a monthly basis and 17.5% from a year ago. These figures are not seasonally adjusted, making monthly changes difficult to interpret. The number of advertised vacancies online for every 100 persons in the labor force slipped to 2.78, from 2.67 in the prior month, but remained well above the year-ago level of 2.4.

CONSUMER SENTIMENT INDEX - Friday, Oct. 26, 10 a.m. EDT

The University of Michigan and Reuters will issue the final reading of consumer sentiment for October. The index probably held steady at the preliminary level of 82, which was down slightly from 83.4 in both September and August. In July, the final monthly reading of consumer sentiment was 90.

The source of weakness was centered in expectations for the coming six months. The initial expectations print for October was 71.6, compared to a final reading of 74.1 in September. Fewer consumers also believe it's a good time to buy big ticket home items such as furniture and appliances.

Consumers could feel a little more downbeat in the coming months if energy prices remain elevated. Oil prices hit a record high in mid-October and the Energy Information Administration is forecasting that households who use heating oil to warm their homes will, on average, pay 22% more than last winter. Those relying on natural gas to heat their home are expected to shell out 10% more, and gasoline prices this winter will remain considerably above their year ago levels, according to the EIA.

Earnings Calendar

Day

Companies

Monday

Apollo Group, Apple, Ecolab, Halliburton, Hasbro, Kimberly Clark, Merck, Pactiv, Plum Creek Timber, Schering-Plough, Texas Instruments, Weatherford International

Tuesday

ACE Limited, Altera, AT&T, Avery Dennison, Biogen Idec, Broadcom, Burlington Northern Santa Fe, C.H. Robinson Worldwide, Chubb, Cooper Industries, DuPont, Johnson Controls, Juniper Networks, Lexmark International, Microchip Technology, Nabors Industries, New York Times, Novellus Systems, Precision Castparts, QLogic, Rohm and Haas, Sherwin-Williams, Sigma-Aldrich, Smith International, T. Rowe Price, Tellabs, Unisys, United Parcel Service, Waters, Western Union, XL Capital

Wednesday

Air Products and Chemicals, Akamai Technologies, Allegheny Technologies, Ambac Financial Group, Ameriprise Financial, Amgen, Anheuser-Busch, AutoNation, Boeing, Boston Properties, Chicago Mercantile Exchange Holdings, Coca-Cola Enterprises, Compuware, ConocoPhillips, Corning, Dover, Express Scripts, Fidelity National Information, Fiserv, General Dynamics, Genzyme, Hercules, Hudson City Bancorp, LSI, Meredith, Monster Worldwide, Moody's, Murphy Oil, National City, National Oilwell Varco, Norfolk Southern, Occidental Petroleum, PACCAR, Praxair, Pulte Homes, Quest Diagnostics, Questar, Ryder System, Sealed Air, Snap-on, Stanley Works, Symantec, Temple-Inland, Terex, Varian Medical Systems, WellPoint, Wm. Wrigley Jr., Zimmer Holdings

Thursday

Aetna, Allegheny Energy, Apache, Ball, Black & Decker, Bristol-Myers Squibb, Celgene, Comcast, CONSOL Energy, Cummins, Developers Diversified Realty, Dow Chemical, Eastman Chemical, EMC, ENSCO International, Estée Lauder, E.W. Scripps, Federated Investors, Genworth Financial, Goodrich Corp., Hartford Financial Services, IntercontinentalExchange, Janus Capital Group, KLA-Tencor, L-3 Communications Holdings, Laboratory Corp. of America, MBIA, MeadWestvaco, MEMC Electronic Materials, Microsoft, Motorola, Newell Rubbermaid, Northrop Grumman, PerkinElmer, ProLogis, Raytheon, Reynolds American, Southern, Starwood Hotels & Resorts, Synovus Financial, Travelers, Thermo Fisher Scientific, UST, Wendy's International, Xcel Energy

Friday

Baker Hughes, Brunswick, Countrywide Financial, Coventry Health Care, Exelon, Fortune Brands, Ingersoll-Rand, KIMCO Realty


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