September 24, 2010

New Home Sales Still Dismal; Stocks Surge on Durable Goods Report

Economist says meaningful housing turnaround not likely till 2012

New home sales figures released Friday by the Census Bureau showed that housing had a long way to go before it joined the "expansion" announced by the National Bureau of Economic Research, which told us on Monday that the recession ended in June 2009.

Orders for durable goods, though, despite falling 1.3% in August, had joined the expansion, as the core components turned in an unexpectedly strong performance. Stocks surged on the report, with the three major indexes closing sharply higher on Friday.

The Dow Jones industrial average rose 198, or 1.9%, to close at 10,860. The Standard & Poor's 500 index rose 24, or 2.1%, to 1,149, ending a three-day losing streak. The Nasdaq composite index rose 54, or 2.3%, to 2,372. About five stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1.1 billion shares.

In August, sales of new single-family houses came in at 288,000, unchanged from the July rate (revised upward) and 28.9% below August figures for 2009.

In an analyst's note, Ian Shepherdson, chief U.S. Economist of High Frequency Economics in Valhalla, N.Y., said, "This is a pitiful performance but it should not come as a surprise to see sales so weak during the summer. The homebuyer tax credit hugely incentivized people to bring forward their home purchases into the spring, so the months after the credit expired were bound to see sales dropping to very low levels."

Steve Blitz, senior economist with New York-based Majestic Research, said in an e-mail message: "There really is no way to sugar coat the reality that the for-sale new single family housing market remains depressed. It would be nice to point to some metric released today indicating that an upturn had begun. Truth is, this market is bouncing along a very weak bottom being held down by any number of factors outside of the macro environment in general and specific to the housing market."

Blitz also pointed out that, with mortgages so hard to get, "a large number of the new homes sold to get the April tax credit were given back to builders because financing was ultimately refused to the buyer." And demographics, too, play their part: "the past decade brought in too many too young to own into the housing market. With that, the industry effectively has to wait for demographics to catch up."

Shepherdson expects no meaningful pickup in home sales till 2011; Blitz does not see a turnaround as likely until "at least 2012."

Regarding durable goods, Shepherdson says, "orders fell 1.3%, a bit more than the consensus of a 1.0% drop, but orders excluding transport rose 2.0%, twice the consensus. As well as the August overshoot in core orders, July orders excluding transport were revised up by 1.0%, to a loss of 2.8%, so net this report is much better than expected."

He points out that plummeting aircraft orders depressed the main numbers, that field being quite volatile, but "Core capital goods orders jumped 4.1% in August, which looks soft when set against the 5.3% July drop, revised from a drop of 8.0%."

The substantial gains of the previous two months, he states, "mean the trend is undoubtedly still upwards. The Institute for Supply Management suggests it will slow but remain positive. After this report you should expect to see Q3 GDP forecasts nudged up, with better capital expenditure numbers than previously expected."

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