Existing Home Sales Collapse in July

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Existing home sales plunged a record 27% in July, falling to the lowest level in 15 years. Inventories of unsold homes rose by an even greater 40% and were at their highest point in over a decade. A spokesman for real estate industry group NAR described the market's disastrous performance, which took place in every region of the country, as a "pause".

Once again analysts missed the number by a mile, being far too optimistic. Predictions were for a drop of 14%, a pretty bad figure in and of itself, but little more than half the actual result. The severe drop was also well telegraphed by a 30% decrease in pending home sales in May. Pending home sales tend to turn into existing home sales around two months later. May pending home sales dropped because of the expiration of the federal government's home buying tax credit on April 30th. It is now quite obvious that all this credit accomplished was to motivate people who were already going to buy a new home to do so sooner rather than later and it didn't create any additional sales. Just another example of how the federal government is wasting tax payer money on ineffective stimulus programs.

The most amazing thing about July's existing home sales is that they were worse than anything that took place during the bottom of the Great Recession when the U.S. economy was shrinking at more than a 6% annual rate. Even at the bleakest point, existing home sales were around the 4.5 million level. This July they fall to a 3.8 million annualized rate. Moreover the drop from June was severe in every region of the United States - down 23% in the South, down 25% in the West, down 30% in the Northeast and down 35% in the Midwest.  At the same time, inventories of unsold homes rose from 8.9 months supply in June to 12.5 months in July. Year over year, July 2010 home sales were down 26% from July 2009. Despite the across the board collapse in demand, median home prices somehow defied the fundamental laws of economics and rose 0.7% to $182,600.

There are three important messages from the July existing home sales numbers. First, the housing market has not yet hit bottom and it could be a long time before this takes place. Secondly, the numerous government programs to stimulate the housing market- and this includes driving mortgage rates to record lows - have failed to make things better. Third, if the housing market is in worse shape than at the bottom of the Great Recession, then we are either already in another recession or about to enter one.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

A Tale of 3 PMIs: China, the EU, and U.S.

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Stock markets in Europe, Asia and the U.S. rallied strongly on August 1st even though reports from purchasing managers in China, the EU and the U.S. did not bode well for future economic activity.

In China, the HSBC PMI (purchasing managers index) for July was 49.4. This indicates Chinese manufacturing contracted last month (50 is the dividing point between expansion and contraction for all the PMI indices). The official Chinese government report though came in at 51.2, indicating a slight expansion was still taking place. China is the growth engine of the world economy and a downturn there has negative implications far and wide. Mainstream media tried to put a positive spin on the news by saying the Chinese government wanted to slow the Chinese economy down, so a drop in manufacturing activity is good news. What the government actually wanted to do was slow down the property bubble created by their massive stimulus program during the Credit Crisis. They did not wish to slow down activity related to exports, which is their bread and butter. That seems to be an unfortunate side effect of their actions however.

While the news out of China was unabashedly bad, traders in the EU were ebullient that the EU purchasing managers July number was revised up to 56.7 from a previous estimate of 56.5. This change is statistically meaningless. Based on the data available, it also looks like Germany was almost single-handedly responsible for the good number. Exports were the key. The big drop in the euro to 1.18 in early June (from around 1.50 late last year) would certainly have boosted exports from the EU since it made their goods much cheaper - and Germany's economy is export based. However, the report also indicated that export orders are slowing (as the euro rises) and new orders are well below this year's peak. The service providers in the report also had the most negative outlook for future activity in eight months.

The U.S. PMI was 55.5 for July, down from 56.2 in June. Of the components in the index, New Orders were down the most, dropping 5.0. The second biggest decline was in Production, which fell 4.4. The Backlog of Orders category was also lower by 2.5. All of these are indicators of future activity. The biggest increase in the report was Inventories, which were up 4.4. Looks like goods are being produced, but are piling up in the warehouse. Together, these components all seem to indicate that U.S. manufacturing will be slowing down later this year.

Manufacturing was the big success story of the stimulus spending that started during the Credit Crisis. This had a greater impact in China than in the Western economies because manufacturing is a greater component of their economy. In the U.S., the service sector is four times bigger than the manufacturing sector, so a buoyant manufacturing sector is not enough by itself to create a strong recovery. This is one reason the American economy remains lackluster despite $3 trillion in budget deficit spending in the last two years. Stimulus spending though will be declining in the U.S. and in the EU into the foreseeable future. We are already seeing what impact that will have based on the PMI reports coming out of China.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.