Past Weekly Notes

Home-price index slips in October; first drop since April — Dec. 29, 2009

The Standard & Poor's/Case-Shiller 20-city home-price index declined slightly in October, slipping 0.05 percent to 146.58 from September's 146.65. That was the first decline in the index since April. Overall, the slight decline in the 20-city index may reflect the historical slowing that happens to home prices in late autumn.

Over the last year, the index is down 7.28 percent compared to September's year-over-year rate of -9.27 percent. The 10-city index showed similar performance. It is down 8.5 percent on a year-over-year basis.

Home prices have fallen 29.2 percent since peaking at 206.52 in June 2006. The current year-over-year rate of -7.28 percent is the lowest since October 2007 but prices remain close to levels that existed in September 2003. Home prices appear to have bounced from April lows but concerns over the “shadow inventory” of unsold homes imply to us that prices may slip in the early part of 2010.

New Home Sales Unexpectedly Plummet — Dec. 24, 2009

New home sales fell 11.3 percent in November to a 355,000 annual rate following a downwardly revised 400,000 annual pace in October. The result was far below market expectations of a rise to 438,000 units. The November rate is the lowest since April 1982. On a year-over-year basis, new home sales are down 9.0 percent compared to October's -2.2 percent. Stunningly, the year-over-year rate has been negative for the past 48 months. From the peak in July 2005 of 1,389,000 units, new home sales are off 74.4 percent.

The inventory of unsold new homes declined to 235,000 in November, down 2.1 percent from October's 240,000 level. Inventories are 36.5 percent lower than a year ago, but the significantly slower sales rate offset the lower inventory level, causing the month's supply of unsold homes to rise to 7.9 months from 7.2 months. To put the inventory overhang into perspective, between 2000 and 2005, the months' supply averaged 4.1 months.

Home prices were higher this month with the median sales price rising 3.8 percent to $217,400 and the average sales price rising 9.5 percent to $280,000. Since the price data is not seasonally adjusted, the best comparison is to levels a year ago. That comparison shows the median sales price at -1.9 percent and the average sales price -3.4 percent. Both measures are likely downward-biased due to greater demand for lower priced homes altering the sales mix.

Overall, new home sales appear to have given back a significant amount and remain only slightly above their record lows of 329,000 units. It is possible some of the decline in the November data may be a function of the anticipated expiration of the first time buyer tax credit (which has since been extended). The only good news in the report is the continued decline in inventories of unsold homes. The present inventory level of 235,000 is the lowest since April 1971. The inventory of unsold homes posted its 31st consecutive monthly decline. The market for new homes remains soft, but nevertheless, the housing market continues to improve. The high level of foreclosures and forced sales may also be responsible for the dichotomy between new home sales and existing home sales. While new home sales are only 7.9 percent off their January lows, (329,000) existing home sales are up 45.7 percent from their January lows. Pending home sales are also up a sharp 41.9 percent from their lows.

Personal Income Up, But Misses Expectations — Dec. 23, 2009

Personal income was up 0.4 percent in November, slightly below Bloomberg expectations for a 0.5-percent gain but higher than October's upwardly revised 0.3 percent. Over the past year, personal income has declined 0.3 percent, but has increased at a 3.9 percent annualized rate over the past three months.

Wages and salaries increased 0.3 percent in November as a slightly longer work week offset the decline in employment. Wages are down 2.8 percent over the past year, but growth over the last three months was at a 1.7-percent annual rate. Personal tax payments fell 0.7 percent and are down 24.7 percent over the past year. Disposable personal income increased 0.5 percent and is up 3.1 percent year-over-year. The savings rate remained steady at 4.7 percent.

Nominal Personal Consumption Expenditures (PCE) rose by 0.5 percent, also below the Bloomberg estimate of a 0.7 percent increase. October data was revised lower to 0.6 percent from the previous 0.7 percent. Over the last twelve months, personal spending is up 2.3 percent. Adjusting for inflation, PCE increased 0.2 percent and is down 0.8 percent year-over-year.

Inflation, measured by the PCE deflator, was up .3 percent on the month and up 1.5 percent year-over-year. At the core level, the PCE Deflator is up 1.4 percent, slightly lower than expectations of a 1.5-percent rate.

Overall, some of the economic recovery is apparent in the data, but at best consumer spending and income growth remains muted. But that is still a big improvement from earlier in the year.

Existing Home Sales Rise More Than Expected — Dec. 22, 2009

Existing home sales jumped 7.4 percent in November to a seasonally adjusted annual rate of 6.54 million units. It makes the highest rate of sales since February 2007 (6.55 million). Expectations had centered on an increase to 6.25 million.

October data however was revised lower to 6.09 million units from the previously reported 6.10 million. Over the last twelve months, sales are up 44.1 percent but remain down 9.8 percent from the high of 7.25 million reached in September 2005.

Single-family sales increased 8.5 percent in November to a 5.77-million-unit pace while condo/coop sales were flat. On a year-over-year basis, single family home resales are now up 42.1 percent while condo/coop sales are up 60.1 percent from year ago levels.

The median sales price increased 0.2 percent to $172,600, down 4.3 percent on a year-on-year basis. The median price is down 25.1 percent from the peak median price of $230,300 established in July 2006.

The inventory of existing homes for sale continued to decline, falling 1.3 percent on the month to 3.52 million units (518,000 condos and 3 million single-family homes). Inventory levels are 14.8 percent below year-ago levels. The supply of unsold homes fell to 6.5 months from 7.0 months in October.

Overall, sales of existing homes continue to surge as first-time buyers flock to the market to take advantage of the first-time home buyer tax credit extension. The number of homes for sale continues to decline and levels are now only slightly higher than “normal” levels. There is thought to be a significant shadow inventory of unsold homes waiting in the wings for a pick-up in sales and prices, yet this inventory has yet to arrive even as sales push sharply higher. We appear to be seeing a moderate recovery in existing home sales, but downward pressure on home prices is still apparent.

3Q GDP Revision Lower Than Expected — Dec. 22, 2009

Third-quarter Gross Domestic Product (GDP) was revised downward further than expected to 2.2 percent by the Commerce Department. Previous estimates released earlier pegged third-quarter GDP at 3.5 percent, which was subsequently lowered to 2.8 percent prior to today’s announcement.

The downward revision was widespread and included consumer spending, equipment and software investment, residential investment, non-residential investment and government spending. Both imports and exports were slightly higher than the second estimate.

Inventory change was revised lower to -$137.2 billion, $3.8 billion lower than the previous estimate. The change in inventories lifted overall GDP growth by 0.7 percent.

Inflation, as measured by the GDP Price Index, was revised from 0.5 percent to 0.4 percent, and is up 0.6 percent for the year, its slowest year-over-year rate of growth since the second quarter of 1950.

Second quarter growth also was revised downward, suggesting insufficient momentum to create jobs or reduce unemployment significantly. However, preliminary fourth quarter data appeas stronger and should rise as inventory liquidation subsides.

Housing Starts Rise Sharply in November — Dec. 16, 2009

November housing starts gained 8.9 percent, rebounding from a steep decline in October. Housing starts are running at a still very low 574,000 annual rate, which is in line with the Bloomberg median estimate. The large monthly increase was driven by a sharp rise in the very volatile multifamily component that increased 67.3 percent after falling 29.5 percent and 22.0 percent in the prior two months. Over the last year, housing starts are down by 12.4 percent and 74.7 percent from the January 2006 peak of 2,273,000 units.

Single-family starts increased 2.1 percent in November to a 482,000 annual rate, recovering only slightly from the sharp drop in October. Over the last year, single-family starts are up 5.5 percent, but remain 73.6 percent below the January 2006 peak.

Overall, housing starts rose sharply in November as multifamily units regained ground after the previous month’s losses. Single-family starts seemingly found a bottom, but there has been little in the way of a sustained increase from the lows.

November Producer Price Index Beats Expectations — Dec. 15, 2009

The Producer Price Index (PPI) jumped 1.8 percent in November as energy prices surged 6.9 percent. This was much higher than market expectations of a 0.8-percent rise. Food prices rose 0.5 percent. Within the energy component gasoline prices increased 14.2 percent, heating oil prices increased 18.3 percent and natural gas prices were up 2.3 percent. Over the past year, the PPI is up 2.4 percent on a non-seasonally adjusted basis, the first year-over-year increase in 12 months. Looking at more recent data, the PPI on a seasonally adjusted basis has increased at a 6.3 percent annual rate over the last three months.

The Core PPI, which excludes the food & energy components, also surprised forecasters by climbing 0.5 percent compared to the Bloomberg median estimate of 0.2 percent. Auto prices were lower by 2.2 percent while prices of light trucks rose 4.2 percent. Computer prices fell by 1.8 percent. On a year-over-year basis, the PPI Core is up 1.2 percent but still significantly lower than the high year-over-year point of 4.6 percent reached in October 2008.

Overall, food and energy prices once again are driving the headline PPI. The headline PPI on a year-over-year basis turned higher for the first time in a year. The Core PPI is higher on an increase in truck prices and has rebounded from the sharp decline (-0.6 percent) last month. Regardless, manufacturing activity remains at very low levels, which should help hold wholesale prices in check.

November Retail Sales Beat Expectations — Dec. 11, 2009

Retail sales rose 1.3 percent in November compared to Bloomberg expectations of a 0.6-percent gain, and were boosted by motor vehicle gains of 1.6 percent. On a year-over-year basis, retail sales are up 1.9 percent, the first year-over-year increase since August 2008.

October data was revised lower to a 1.1-percent gain from the previously reported 1.4 percent.

Excluding motor vehicles and parts, retail sales gained 1.2 percent in November, ahead of market expectations of a 0.2-percent increase. Higher gasoline prices lead to a 6-percent increase in sales at gas stations. Good gains were found in electronic and appliance sales, building materials and garden, non-store retail and general merchandise. Declines were seen in furniture and home furnishings, clothing and accessories and miscellaneous retail. Over the last year, core retail sales increased 1.3 percent, ending a string of 12 consecutive declines.

Overall, retail sales showed some broad based gains in November, with the headline data driven by the very large increase in sales at gasoline stations and car sales. Despite high unemployment and tight credit conditions, consumers are still spending. The average sales of October and November are above the average of the last quarter, indicating solid consumer spending for the current quarter.