By Jim Cooper
The housing market was supposed to start cooling off when the Federal Reserve began raising interest rates a year ago. But eight rate hikes and 200 basis points later, it's as hot as ever.
Indeed, Federal Reserve Chairman Alan Greenspan has even acknowledged that it has gotten "frothy" in some parts of the country. The latest batch of figures is likely to show more froth. Economists polled by Action Economics expect the data to show that new and existing home sales remained close to historically strong levels in May. Through April, each are on a pace to set yet another yearly record.
Homebuilders are still feeling optimistic. Housing starts ticked higher in May, although the number of building permits issued fell. The National Association of Homebuilders' housing market index hit a reading of 71, the best level so far this year.
The survey's index of prospective homebuyer traffic climbed to its highest level since September, 1999. The strong demand comes even as the NAHB's first-quarter housing opportunity index showed on a nationwide basis that housing affordability fell to its lowest level since the index was constructed in 1992.
With long-term interest rates remaining low, Americans are still rushing in to buy homes. The volume of mortgage applications hit another weekly high for the period ended June 10. However, potentially riskier varieties of mortgages are gaining popularity. There also appears to be an increase in speculative buying.
These trends are fueling the housing bubble debate. If and when long-term rates move up in response to the Fed's action, there could be a swift decline in demand. Plus, those who don't have adjustable-rate mortgages will see their home payments jump. That could make the end of the housing boom particularly painful for many new homebuyers. For now, however, the boom continues.
Here's the week's economic calendar.
MEETINGS OF NOTE
Monday, June 20U.S. President George W. Bush meets with European Union Council President Jean-Claude Juncker and European Commission President Jose Manuel Barroso at the annual U.S. European Union summit in Washington, D.C.
10:15 a.m. EDT
Federal Reserve Bank of Richmond President Jeffrey Lacker speaks about retail financial innovation to the Virginia Bankers Association in Hot Springs, Va.
Monday, June 20, 10 a.m. EDTThe Conference Board's composite index of leading economic indicators is expected to have fallen another 0.3% in May. That is the consensus among economists polled by Action Economics. The April index declined 0.2%, on top of a 0.6% drop in March, and a 0.1% decrease in February. On a yearly basis, the April index was off 1.1%.
The Federal Reserve's moves to raise its overnight fed funds rate along with falling long-term interest rates have been weighing on the Conference Board's index. The spread between short- and long-term rates carries the most weight among the index constituents and a narrower spread hurts the index.
A smaller interest rate spread between long and short rates has typically meant short-term rates are rising faster than long-term rates in an effort by the Fed to cool down a potentially overheated economy.
The scenario is a little different this time. Long-term rates have fallen as the bond market believes inflation is already well contained. The Fed, meanwhile, wants to raise interest rates from the unusually low levels of the past year to a neutral level that neither stimulates nor slows economic activity.
MEETING OF NOTE
Tuesday, June 21U.S. President George W. Bush meets with Prime Minister Phan Van Khai of Vietnam at the White House in Washington, D.C.
Federal Reserve Board Governor Mark Olson testifies on regulatory relief proposals to the Senate Banking Committee in Washington, D.C.
Tuesday, June 21Darden Restaurants (DRI ) , Jabil Circuit (JBL ), Kroger (KR ), and more.
ICSC-UBS STORE SALES
Tuesday, June 21, 7:45 a.m. EDTThis weekly tracking of retail sales, compiled by the International Council of Shopping Centers and Swiss bank UBS, will update buying activity for the week ending June 18. Sales were up 0.6% for the week ended June 11, following a 0.4% in the previous period, and a 1% decline in the week ended May 28.
INSTINET REDBOOK RESEARCH STORE SALES
Tuesday, June 21, 8:55 a.m. EDTThis weekly measure of retail activity will report on sales for the period ended June 18. During the first two fiscal weeks of the month, ended June 11, sales were off 0.3% compared to the same period in May. For the entire month of May, sales were up 2.5% compared to April.
Wednesday, June 22Bed Bath & Beyond (BBBY ), Morgan Stanley (MWD ), and more.
Wednesday, June 22, 7 a.m. EDTThe Mortgage Bankers Association releases its numbers on mortgage applications for both home buying and refinancing for the week ending June 17.
Over the week ended June 10, the purchase index soared to a new record high of 529.3, after rising to 479.3 for the week ended June 3, from 462.7 for the week ended May 27. The four-week moving average, however, grew to 488.4, from 473.4 for the week ended June 3. The average rate on a conventional 30-year mortgage, according to HSH Associates, fell a little more. In the week ended June 10 the rate held at 5.74% for a second straight period.
The MBA's refi index shot higher. In the period of June 10, the index stood at 2967.4, from 2362.1 in the previous period, and 2142.1 in the week ended May 27. The four-week moving average climbed to 2409.9, from 2177.2 in the week ended June 3.
Thursday, June 23Family Dollar (FDO ), FedEx (FDX ), Solectron (SLR ), Tektronix (TEK ), and more.
Thursday, June 23, 8:30 a.m. EDTFirst-time claims for jobless benefits for the week ended June 18 most likely dipped to 330,000. Jobless claims were virtually unchanged at 333,000 in the week ended June 11, from 332,000 the previous week. Initial claims during the seven-day period ended May 28 stood at 351,000.
The four-week moving average climbed to 335,000, from 332,300 during the previous period. Continuing jobless claims rose to 2.64 million, from 2.58 million in the week ended June 4.
EXISTING HOME SALES
Thursday, June 23, 10 a.m. EDTSales of existing homes, which includes single-family homes and condominiums, are forecast to have edged lower in May. The consensus among economists surveyed by Action Economics is for an annual rate of 7.15 million. In April, sales established another record by hitting an annual pace of 7.18 million, from a rate of 6.87 million in March, and 6.82 million in both February and January.
MEETING OF NOTE
Friday, June 24Canadian Finance Minister Ralph Goodale speaks at a luncheon hosted by Canadian Association in New York City.
DURABLE GOODS ORDERS
Friday, June 24, 8:30 a.m. EDTOrders for durable goods coming into factories in May are expected to show a 1% rise, according to Action Economics. During April, orders rebounded with a 1.9% increase, after three consecutive monthly declines.
The improvement was due in large part to a 27.3% surge in computer orders and a 27.3% jump in orders for civilian aircraft and parts. A good proxy for business spending is durable goods orders minus defense equipment and aircraft categories. In May, this core non-defense capital goods orders measure rose 1.7%, after falling 1.6% in April.
The latest round of factory data is mixed. The May industrial production figures showed a 0.6% gain in factory output. New York Federal Reserve Bank's June regional factory activity surveys showed marked improvement from May. However, the Philly Fed regional survey slipped to a negative reading of -2.2 in June, from 7.3 in May.
NEW RESIDENTIAL SALES
Friday, June 24, 10 a.m. EDTNew single-family homes sales probably held fairly steady. The consensus among economists surveyed by Action Economics is for sales to stand at an annual pace of 1.32 million. In April, hit an annual pace of 1.32 million, from 1.31 million in March, and 1.26 million in February.
The Federal Reserve's Beige Book report and the June 9 testimony from Chairman Alan Greenspan point to more quarter-point rate hikes by the central bank. It appears that some homebuyers are rushing into the housing market in order to take advantage of the latest downward swing in mortgage rates.
Cooper is a senior editor and Business Outlook editor for BusinessWeek in New York