Wednesday, September 5, 2007

Has Anybody Seen The Fat Lady

The National Association of Realtors' index of signed purchase agreements dropped 12.2 percent after gaining 5 percent in June, the group said today in Washington. The decline was more than five times the median forecast of economists surveyed by Bloomberg News. The number of Americans entering into contracts to buy previously owned homes plunged in July by the most since records began in 2001, worsening the two-year housing recession. The median forecast was for a decrease of 2.2 percent, according to a survey of 26 analysts. Estimates ranged from a drop of 4 percent to an increase of 1.5 percent.

That is the Good News!!!

How is that so many people missed the number by such a wide margin? One might say that “Hope Springs Eternal”. Many people felt that the worst of the housing problem was behind us. I have been talking for over a year that the problem in the real estate market was just beginning and had a long way to go before it was over. In some respects, the same is true about the stock market correction.

The two weeks in August were scary, but as soon as we got an up day after about a 10%, correction--it was up and away. I have been in this business for almost 35 years and I have never seen a correction that was over so quickly as people wanted to believe this correction was over. In an earlier comment on this Blog, I said that I did expect a relief rally, but we must go back and test the low to see if it will hold. The critical time will be around the Fed decision on the 18 of September.

The market has already built in “Baked In” a reduction in Fed interest rates. The risk is that if the Fed does not move at all or does not move rates down far enough the stock market could sell off through the most recent lows. The current estimate is that over 1.5 million adjustable rate mortgages will reset over the next 12 to 18 months. A decline in short-term interest rates by the Fed will not help many of those homeowners to afford their mortgage and keep their homes.

One additional thought about housing and the “Bean Counters”. The housing activity has been in a decline for over two years and counting. This economic recovery created over 500,000 jobs in the housing sector. With the decrease in demand, fewer homes are being built. Lower demand for housing should show up in layoffs of people employed to build homes. Economists have been asking the question, “Why haven’t these layoffs shown up in the employment data?”

One thing the economists may be missing is the magnitude of the extent of the employment of illegal aliens in the construction of homes. These jobs were with the home builders and the subcontractors to the home builders have not been counted. As the housing market continues to contact, we will start seeing the layoffs of legal workers.

ADP Employer Services projects companies in the U.S. added the fewest jobs in August since 2003. The 38,000 increase reported was less than forecast and followed a revised gain of 41,000 for the prior month. Fridays employment data is a two edged sword. One side wants the Fed to cut interest rates so, a bad number (decline in new jobs and an increase in unemployment) would be good for them. On the other hand those who believe that the economy is still good will want a low number so that inflation will not be a problem and the Fed will not have to raise interest rates to slow the economy. I think both sides might be very disappointed at 8:30 AM on Friday morning.

Dan Perkins

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