I remain skeptical on the housing market and the recovery portrayed in the current numbers.
The National Association of Realtors reported today that purchases of previously owned homes in April rose to the highest level in five months. Purchases increased 7.6% month-over-month to a 5.77 million annual rate (the median price climbed 4% from April 2009). The housing industry is still being supported by the Government and the positive trends are expected to hold up through next month as buyers who close by June 30th are still eligible for the $8,000 Federal Housing Tax Credit.
Part of our negative thesis on Housing was based on rising mortgage rates, triggered by the end of the Federal Reserve's $1.25 trillion mortgage-securities purchase program. While we understand the issues surrounding the “Sovereign Debt Dichotomy” in Europe, we did not see mortgage rates going lower. Sovereign debt issues are forcing money to seek a safe haven in the U.S., pushing domestic mortgage rates to the lowest levels of the year and back to near 50-year lows.
I remain skeptical on the housing market and the recovery portrayed in the current numbers. Today’s housing data, once again, showed the volatility associated with the government stimulus program and the unsustainable nature of the improvement in the housing market.
It is questionable that the recent drop in borrowing costs, prompted by concern over the European debt crisis, will help underpin sales after the loss of government support. A more important issue will be employment trends and how fast the Obama administration can get the job growth engine started again. Based on last week’s jobless claims numbers, a leading indicator, it is likely that the next move in the unemployment rate will be up, not down.
The Consumer Discretionary sector (XLY) and stocks leveraged to the housing sector have been among the best performers today with the XLY up 0.4% and the S&P Home Builders index up XHB +1.2%. The XHB fell 6.9% last week, underperforming the broader market. As our Financials analyst, Josh Steiner, pointed out, the news was not particularly good on the inventory front, as the number of existing homes on the market jumped 12% to 4.04M, the highest level since July. This pushed the months' supply to 8.4 from 8.1 in March. Interestingly, the NAR noted that the jump in inventory was larger-than-normal for this time of the year and is not a "healthy" development, adding that there will be no "meaningful" increase in home prices in 2010 and possibly in 2011.
Howard Penney
Managing Director
