Solid Business Investment Helps Offset Weakness in Housing

MBA (7/28/2008 ) Velz, Orawin
Several housing reports last week indicated a lingering weakness in housing activities. New home sales edged down 0.6 percent in June but sales for the prior months were revised upward considerably. Total existing home sales fell 2.6 percent in June as a result of the drop in single-family home sales to the slowest pace since January 1998.
So far this year existing home sales fared significantly better than new home sales. Sales of new homes during the first half of this year were down 35.4 percent from the same period last year, compared with a year-to-date drop of 17.6 percent for existing home sales. Foreclosure sales have helped support sales of existing homes, especially in the West region where the foreclosure rate is the highest and home price decline is the largest.

While home sales continued to decline, the pace of decline has moderated. New home sales for the second quarter were down 17.1 percent (annualized rate), compared with a 44.9 percent drop in the first quarter. For existing homes, sales dropped at annual rate of 3.2 percent in the second quarter, just slightly below the pace of decline in the first quarter but a significant improvement over a drop of at least 25 percent in each of the last three quarters of 2007.

The excess supply of homes has not improved, however. The months’ supply or the inventory-sales ratio was 11.0 months for total existing homes and 10.0 months for new homes—historically high levels. Separately, the second quarter homeowner vacancy rate—the share of owner-occupied housing units that are for sale and vacant—declined just 0.1 percentage points below the record 2.9 percent it reached in the first quarter. Owners of vacant homes are under a lot of pressure to sell and are more likely to sell at a deep discount. All combined, areas with large inventory overhang will continue to see price declines.

One report last week offered encouraging news for manufacturing activity and business investment: durable goods orders defied expectations, increasing 0.8 percent in June. A huge drop in the volatile civilian aircraft orders tempered the overall increase. Excluding transportation orders, durable goods orders posted the biggest jump in six months. Both the component used in the calculation of gross domestic product (GDP) in the second quarter and the component used as a proxy for business investment in equipment and software in the coming quarters showed solid increases. The report bodes well for the second quarter economic growth, which likely accelerated to around 2.0 to 3.0 percent from 1.0 percent in the first quarter, and for business investment in the second half of the year.

Consumer confidence improved in July for the first time in six months, according to the University of Michigan’s Consumer Sentiment Index. The improvement likely reflected declining gasoline prices in the last half of the month. Despite some good news this week, the economy is not yet out of the woods: The Conference Board’s Index of Leading Indicators fell in June for the second consecutive month, suggesting slower economic activity later in the year.

Long-term Treasury yields rose sharply during the week prior to last week and mortgage rates jumped, according to both the Mortgage Bankers Association’s Weekly Mortgage Applications Survey and Freddie Mac’s Primary Mortgage Market Survey. Concerns about rising inflation as well as investors’ concern over mortgage-backed securities contributed to the increase in rates. Interest rates remained elevated last week.

On Thursday, the Treasury markets rallied and yields dropped sharply as investors sought safe havens from stock markets. Stocks tumbled in response to downbeat earnings and existing home sales data. On Friday, the Treasury market declined on better-than-expected durable goods orders, new home sales and consumer sentiment reports. The yield on the 10-year Treasury note stayed around 4.11 percent by mid-Friday afternoon, the same as the rate on the previous Friday.