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Friday, August 24, 2007

Inman News

The rate of new single-family home sales dropped about 10.2 percent in July and the median sales price rose 0.59 percent compared to the same month last year, the U.S. Census Bureau and Department of Housing and Urban Development announced today.


Sales of new single-family houses in July 2007 reached a seasonally adjusted annual rate of about 870,000, compared with the July 2006 estimate of 969,000. The rate is calculated as a projection of the monthly sales total over a 12-month period, adjusted for seasonal fluctuations in sales activity.

The median sales price of new houses sold in July 2007 was $239,500, compared with a median price of $238,100 in July 2006. Meanwhile, the average price of new homes sold in July 2007 was $300,800, down 3.4 percent compared with the July 2006 average price of $311,300.
What's" Your Home Worth?

The seasonally adjusted estimate of new houses for sale at the end of July was 533,000, which represents a supply of 7.5 months at the current sales rate. A supply greater than six months is generally considered to indicate a buyer's market.

Statistics are estimated from sample surveys and are subject to sampling variability as well as nonsampling error including bias and variance from response, nonreporting and undercoverage, the agencies noted.

Changes in seasonally adjusted statistics can show irregular movement, and it can take five months to establish a trend for new houses sold. Preliminary new-home sales figures are subject to revision. On average, the preliminary seasonally adjusted estimate of total sales is revised about 3 percent, according to the report.

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By Jeff Bater From The Wall Street Journal Online

Home builders slowed groundbreakings during July, pulling construction to its lowest rate in 10 years as sales keep tumbling and credit tightens, a government report said Thursday.

Housing starts decreased by 6.1% to a seasonally adjusted 1.381 million annual rate, after rising 2.1% in June to 1.470 million, the Commerce Department said. Originally, Commerce reported June starts 2.3% higher at 1.467 million.

July starts were lower than Wall Street had predicted. The median forecast of 22 economists surveyed by Dow Jones Newswires was a 4.6% drop to a 1.400 million annual rate. It was the lowest level of starts since 1.355 million in January 1997.

Discuss Have you recently sold your home in a down market? Tell us your story.

The housing sector is a mess. Year-to-year, housing starts were 20.9% below the level in July 2006. Falling demand for new homes and bloated inventories are discouraging builders. They are also worried about tight credit, a fear that has rattled financial markets in the past week and led central banks in parts of the world to rush in with injections of liquidity.

This week, the National Association of Home Builders said its August survey found members' confidence at the lowest since 1991.

"The decline in builder confidence is consistent with our outlook for further construction cuts and a prolonged housing recession," Lehman Brothers said in a note to clients Wednesday.

The Federal Reserve released a survey on Monday examining credit conditions in the U.S. Of the 16 domestic banks surveyed that originate subprime loans, 56% said they have tightened standards on those loans. Of those originating nontraditional mortgages including adjustable-rate and interest-only mortgages, 40% said they had tightened credit standards. The quarterly study of senior loan officers said demand for many types of commercial and consumer loans has weakened in the past three months. And 38% of survey respondents reporting weaker demand for prime mortgages; 44% of subprime issuers reported weaker demand.

The subprime crisis is behind an anxiety that some label a "credit crunch." Fears abound that more and more lenders will grow gun-shy. The phenomenon has been described as a financial contagion leading to a restriction on the availability of credit in world financial markets. The roots of the crisis are in the high-cost money that lenders doled to borrowers with bad credit who wanted to purchase homes. Rising interest rates and falling property values drove up defaults and foreclosures among these homeowners. That caused some lenders to shut down and cost investors billions of dollars in securities tied to subprime mortgage assets. Analysts see an unpleasant impact on the slumping housing market.

"Prospects for future sales remain grim given credit problems in the mortgage market," Lehman's note said. "Builders fear that tighter lending standards and the liquidity squeeze in the mortgage market will limit mortgage availability, further restraining sales."

Thursday's data contained a sign things will get even worse: building permits tumbled 2.8% to a 1.373 million annual rate in July. Economists had expected permits to drop 0.6% to a rate of 1.405 million. June permits fell 7.0% to 1.413 million. Permits, of course, are an indicator of future building activity.

July single-family housing starts decreased 7.3% to 1.070 million. Construction of housing with two or more units fell 1.6% to 311,000; within that category, groundbreakings of homes with five or more units -- or multi-family -- were 2.5% lower.

Regionally, housing starts decreased by 1.3% in the Northeast, 3.7% in the West, and 11.0% in the South. Construction rose in the Midwest, up 2.6%.

Nationwide, an estimated 127,800 houses were actually started in July, based on unseasonally adjusted figures. An estimated 118,600 building permits were issued last month, also based on unadjusted figures.

Jobless Claims Rise
The number of U.S. workers filing new claims for jobless benefits increased for a third-straight time last week to its highest level in two months, suggesting that labor markets continue to soften after tepid job gains in July.

Jobless claims were up 6,000 to 322,000 on a seasonally-adjusted basis in the week ended Aug. 11, the Labor Department said Thursday. Claims for the Aug. 4 week were unrevised.

Wall Street forecasts had called for 1,000 decline last week to 315,000, according to a Dow Jones Newswires survey.

The four-week average -- which economists use to gauge underlying labor market trends -- rose 4,750 last week to 312,500.

Labor markets are being eyed amid growing worries about the availability of credit in financial markets that have led to steep drops in global equity markets. As long as labor markets hold up, economic fundamentals should support growth. But if they start to falter, then consumers could curtail spending, which makes up the bulk of economic activity.

Nonfarm payrolls expanded by just 92,000 last month and the unemployment rate ticked up, though it remains low by historical standards. Thursday's claims figures suggest the underlying trend remains decent, though not as strong it was earlier in the year.

The Federal Reserve last week held interest rates steady at 5.25% for a ninth-straight time dating back to last summer and continued to cite inflation as its primary concern, though it acknowledged some downside growth risks. Officials again cited high resource utilization -- a nod to the tight jobs market -- as an inflation risk.

If labor markets and, in turn, consumption head lower it would likely intensify pressure on Fed officials to lower rates. Futures markets are already pricing in rate reductions as early as next month to alleviate credit crunch worries.

According to the Labor Department report Thursday, continuing claims for workers drawing unemployment benefits for more than a week rose 17,000 to 2,567,000 in the week ended Aug. 4, the latest week for which such data are available. That's the highest reading in four months.

The insured unemployment rate was unchanged at 1.9% in the Aug. 4 week.

There were 33 states and territories reporting an increase in initial jobless claims for the Aug. 4 week, while 20 reported a decrease.

Kentucky had the biggest increase, 4,731, due to layoffs in automobile and manufacturing industries. California reported the sharpest decline, 1,999, due to fewer layoffs in trade and services industries.

-- Brian Blackstone contributed to this article.
Email your comments to rjeditor@dowjones.com.

By:
Sean McAlister

In a recent report for homebuyers, all signs suggest that their time is now. In many parts of the country, sellers have finally gotten the message by now, and homebuyers must take the hint. Real estate experts say a switch in the psychology of the housing market has helped buyers to see the silver lining around the market's storm clouds and usher in the fine shopping weather. Two years of stormy real estate markets appear to have created an ideal climate for bargain-minded house hunters who know where to look.

David Lereah, the chief economist for the National Association of Realtors, said that "we are now in a solid buyer's market," also added "It has been a seller's market for many years, but now we are seeing people across the country making deals and bringing prices down."

"What happened was, investors pulled out in droves, and the housing markets went dead," comments Lereah, "When the investors stopped buying, regular buyers got scared." A loss of confidence on the part of real estate investors triggered the psychological switch, he says.

"Now they are making deals," Lereah says, speaking about the dearth of buyers, sellers eventually realized they would have to make concessions on their sale prices.

Mickey Levy, the chief economist for the Bank of America, points out that the market is also suffering from an oversupply of homes created by an overzealous home-builder community. If the downturn was simply a product of a short-term panic, things would likely be back to normal by now.

He says that "While demand is picking up, there is still that large supply overhang," and added "And while the numbers are starting to come up for sales, prices still have a bit to drift before they start rebounding." With a listless housing market, savvy buyers in many markets across the U.S. are finding themselves in the best position they have been in for nearly a decade when it comes to price negotiations.

Levy does warn, however, that not all sellers are in a dealing mood. He also said that "Even though existing-home prices are basically flattish on a national level, I would issue a bit of caution with that number," following up with "Housing is inherently a local market, and national numbers are notorious for not offering an accurate snapshot of what is happening in a particular market.

"On the whole, Levy says to expect prices, on average, to drift slightly lower as a function of clearing out excess inventory. And inventory is the key. So, while prices in Southern California and parts of Florida may be down significantly, other markets may still be enjoying healthy price gains.

SOMETIMES VOLATILITY FEELS good, as demonstrated by Friday's market rally, but by its very nature, what volatility giveth it will also taketh away.

The latest gains, fueled by the Federal Reserve's surprise move to knock a half percentage point off the discount rate that it charges banks for loans, are a welcome relief for the ravaged market. Enjoy it while it lasts. The Chicago Board Options Exchange Volatility Index, or VIX, also known as the "investor fear gauge," tumbled early Friday to near 25 before bouncing back to 29.99 by the end of trading, still miles above its 52-week low of 9.39. There's little reason to think volatility will abate anytime soon.

Tobias Levkovich, Citigroup's chief U.S. equity strategist, wrote Thursday that although investors like to think a fed-funds rate cut will dampen volatility, he believes it would only be helpful if economic conditions don't break down further.

"As a reminder, the surprise Fed rate cut in January 2001 did little to turn the tide, even though it provided some very short-term relief, since the capital spending driven economy faltered and earnings collapsed," Levkovich wrote. "Thus, a Fed rate cut without some willingness to lend money to small business and consumers would equally end up being in vain." The rate-setting Federal Open Market Committee is scheduled to meet next on Sept. 18.

MORE ON STOCKS FROM SMARTMONEY.COM

Dow Correction Serves Up Big-Cap Bargains When Less Is More Woes Widen as Countrywide Forced to Tap Credit Line
And as horrible as August has been, historically September is the worst time of the year for average monthly performance. It would be entirely in this market's character to follow Friday's euphoria with another fire sale next week or next month.

The Dow was down 10%, albeit briefly, on Thursday from its all-time closing high of 14000 set on July 19. And even with Friday's rally the industrials are off 1,000 points in a month. In light of recent extreme volatility the Dow appears likely to re-test those lows again soon.

Be fearful when others are greedy, Warren Buffett has said, and greedy when others are fearful. The next time the Dow flirts with 12600, the dreaded, official 10% correction, there are sectors to grab greedily and some of which to remain fearful. (See "Dogs and Diamonds of the Dow" sidebar.)

Firmly on the buy side are some of the Dow's technology stocks. "They're just being indiscriminately sold now and are creating some real bargains," says Art Hogan, chief market strategist at Jefferies & Co.
As growth stocks, tech tends to outperform later in the market up-cycle and this one is rapidly approaching six years. Furthermore, tech stocks with diversified global revenue streams — meaning they're not solely at the mercy of the U.S. economy and consumer — offer the best bets. Surging demand for PCs helped Dow component Hewlett-Packard (HPQ: 47.15, +1.10, +2.4%) report better-than-expected earnings after Thursday's bell. The company also raised its outlook. Just as important, H-P has robust free cash flow and little debt — key considerations in this tight credit environment. And its forward P/E offers a discount to the broader market.

In much the same vein, Microsoft (MSFT: 28.25, +0.44, +1.6%) trades at a discount to the S&P 500 and has no debt. Intel (INTC: 23.70, +0.60, +2.6%) looks attractively underleveraged, but it's forward P/E offers a premium to the broader market. International Business Machines (IBM: 110.90, +1.21, +1.1%) trades at a deep discount to the market, but carries a lot of debt.

After tech, the most promising stocks are to be found in energy, a key overweight sector at Citigroup. "With powerful cash flow, the energy sector is not likely to be burdened with debt and our proprietary valuation work is very supportive for integrated oil and gas names," Levkovich wrote Thursday.
True, Dow component Exxon Mobil (XOM: 84.14, +3.47, +4.3%) is highly leveraged, but it also generated more than $36 billion in free cash in the trailing 12 months. Meanwhile, it's forward P/E offers discounts of about 20% and 15% to the broader market and its own five-year average, respectively.

On the other side of the ledger are the financials. They stand to continue to sell off despite seemingly attractive valuations. "I'm not a real fan of the financials here," says Ed Yardeni, president and chief investment strategist of Yardeni Research. "I think they're going to continue to be distressed and be a source of unhappy news and I think earnings comparisons are going to be tough."

Sometimes stocks are cheap for a reason, and with so much uncertainty as to where the next subprime landmines lay, the risks appear to outweigh the rewards. Remember, the equity markets, trading on emotion rather than deliberation, are the tail. The credit markets are the dog. That puts Dow components American Express (AXP: 58.89, +0.72, +1.2%), Citigroup (C: 48.81, +1.26, +2.7%) and JP Morgan Chase (JPM: 47.01, +1.54, +3.4%) off the buy-on-the-next-dip list, despite deeply discounted forward P/Es. Insurer American International Group (AIG: 65.96, +2.01, +3.1%) offers financial services, as does conglomerate General Electric (GE: 38.45, +1.25, +3.4%). Be wary there, too.

It takes a steely tolerance for risk to buy when everyone else is selling. But that, of course, is when the best opportunities present themselves. "I think that 12 months from now we'll look at some stock prices that we're seeing quoted these days and say that was really a buying opportunity," says Jefferies' Hogan. "It's just very difficult for the average investors to catch those falling knives."