Vital Signs: Housing Slump Seen Stretching into 2008

On tap: November home sales and durable goods, October home prices, and December consumer confidence

About this time last year, there was cautious optimism among home builders, economists and investors that the housing market was stabilizing. Turns out, it was just a short pause before a fresh and far steeper downturn. That's why nobody is getting excited about the uptick in October new home sales, a yearlong decline in new home inventories, and the massive pullback in new home construction.

Indeed, economists expect November new home sales to pull back after the October surprise. And even if the Census Bureau's figures rise, don't expect to hear many comments about housing hitting bottom just yet. There are just too many factors still battering the market: Home prices are still falling, which keep potential buyers on the sidelines waiting for the market to stabilize; banks have ratcheted up lending standards; the delinquency and default rates remain elevated; and the level of unsold new homes is greater than reported by the government because it doesn't keep track of cancellations.

All those factors look set to keep weighing on home sales, prices, and construction well into 2008. That means builders will need to dial back even more on new projects, which translates into an ongoing drag on real gross domestic product by diminishing residential construction activity. It also means that manufacturers will continue to face weaker domestic demand for a lot of different housing related durable goods, ranging from construction machinery to appliances.

Another potential upshot of ongoing turbulence in housing could be consumer spending. Falling home prices are hurting many consumers' balance sheets and capping, if not lowering, their net worth. The potential negative wealth effects could lead many consumers to reassess their spending and saving habits.

Right now, that still doesn't appear to be happening. Despite the tumble in consumer confidence, spending this holiday season has not cratered as some analysts, retailers, and economists feared. Indeed, consumer confidence is expected to keep declining in December, right in the middle of the big holiday season. Meanwhile, retail and chain store sales figures have shown a respectable performance. Heading into the stretch run of the shopping season, everyone will be closely watching all consumer-related indicators.

The bond market will close early on Dec. 24 and all financial markets will be closed on Tuesday, Dec. 25 in observance of the Christmas holiday.

Here's the weekly economic calendar, from Action Economics.

Economic Reports
Report Date Time For Median Estimate Last Period
Durable Goods Orders Thursday, Dec. 27 8:30 a.m. November 1.0% -0.2%
Consumer Confidence Thursday, Dec. 27 10:00 a.m. December 86.7 87.3
New Home Sales (Mln) Friday, Dec. 28 10:00 a.m. November 0.723 0.728

MORTGAGE APPLICATIONS - Wednesday, Dec. 26, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Dec. 21. A rebound in mortgage rates have driven applicants away, as the average interest rate for a 30-year fixed-rate mortgage climbed to 6.18%, from 6.07% for the week of Dec. 7.

The purchase index dropped 10.6% to 422.2 from 472.0 the week before. But it was the refinancing activity that really responded to higher rates, with a 27.3% plunge to 2093.6 from 2879.8 the previous period.

The latest drops crimped the four-week moving averages as well. The refi index slipped to 2456.9 from a more than two year high of 2483.5 during the week ended Dec. 7. The moving average for the purchase index was 440.4 from 440.9 in the prior period.

S&P/CASE SHILLER HOME PRICE INDICES - Tuesday, Dec. 27, 7:45 a.m. EST

The S&P/Case Shiller Home Price Indices measures changes in home prices on a monthly basis in twenty major metropolitan areas. Price changes are tracked by using repeat sales data. When a house is resold, the latest sales price is paired up to the amount from the prior purchase. The September home price index for a group of 20 cities fell 0.9%, marking a fourteenth consecutive monthly drop. It was the biggest monthly decline since this index began in 2000. The longer running composite index of 10 cities also posted a 0.9% decline, the biggest drop since early 1991.

On a monthly basis, the cities posting the biggest drops occurred in San Diego, Phoenix, Miami and Los Angeles. These cities also saw the biggest price gains during the housing boom.

On a yearly basis, the 20-city composite index was off 4.9% in September, from 4.3% in July. The 10-city index was down 5.5%, the sharpest decline since 1991. Even in cities where prices are still rising, such as Seattle, Charlotte, Portland and Dallas, the gains are rapidly slowing. Most economists believe home prices on a national basis will keep falling through much, if not all, of 2008.

ICSC-UBS STORE SALES - Wednesday, Dec. 26, 7:45 a.m. EST

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will present sales results for the week ended Dec. 22. In the week ended Dec. 15, sales posted an impressive 1.4% gain, after ticking up 0.2% in the prior week and a drop of 2% in the week ended Dec. 1. For the week that included the post-Thanksgiving holiday, sales edged down 0.1%.

On a yearly basis, sales were up 2.1% in the week ended Dec. 15, slightly slower than the 2.3% gain in the week ended Dec. 8.

JOHNSON REDBOOK INDEX - Wednesday, Dec. 26, 8:55 a.m. EST

This weekly measure of retail activity will report on sales through the first three fiscal weeks of December, ending Dec. 22. In the first week, sales were down 0.6%. In November, receipts were up 0.3%.

RICHMOND FED SURVEY - Wednesday, Dec. 26, 10 a.m. EST

The Richmond Federal Reserve Bank releases its survey of manufacturing activity for December. Over the past year, this regional factory report has been relatively downbeat with an average reading of -3. However, the region's manufacturers shed some of their pessimism in November. The overall November current activity index bumped up to 0, after dropping to -5 in the month before from 14 in September. A negative reading means factory activity contracted during the period.

The latest report showed a swing in the shipments index -- from -5 in October to 1 in November. The new orders index also appeared to shrink at a much slower pace. On the down side, the labor market readings deteriorated.

Looking ahead at the coming six months, the region's manufacturers expressed less optimism. The shipments, new orders, and employment indexes all gave ground. One bright spot was the capital spending measure, which climbed to a 12-month high of 26, from 19 in October. Overall, this report remains more bearish about factory activity than other regional and national factory activity reports.

JOBLESS CLAIMS - Thursday, Dec. 27, 8:30 a.m. EST

The number of initial jobless claims bounced up 346,000 for the week ended Dec. 15. In the week ended Dec. 8 claims stood at 334,000, after a reading of 339,000 in the prior period. The current level is slightly elevated compared to the average this year.

The four-week moving average also receded. The level for the week of Dec. 8 was 338,750, from 340,750 for the week ended Dec. 1. Continuing jobless claims, which run a week behind the initial claims figures, ticked up. The latest level was 2.64 million, from 2.6 million in the week ended Dec. 24.

DURABLE GOODS ORDERS - Thursday, Dec. 27, 8:30 a.m. EST

Economists are once again forecasting a rebound in durable goods orders for November. In October, the consensus expected a modest improvement, but instead orders posted a third straight monthly decline. The October slip was just 0.2%, after drops of 1.4% in September and 5.3% in August.

Although the October decline was the smallest of the past three months, the underlying details were disconcerting. Weakness in transportation, particularly autos and non-defense aircraft, accounted for significant chunks of the September and August retreats. In October, however, the weakness was more widespread, with machinery orders off 1.9% and demand for computers and electronic products plunging 7.1%.

The important measure of capital goods orders excluding defense equipment and the highly volatile civilian aircraft category fell 2%. This reading is often called core capital goods orders and is viewed by economists as a reliable gauge of business investment.

Since the last report, other manufacturing related figures have indicated some improvement in conditions. November factory output rose and the Institute for Supply Management's national factory activity report showed signs of stabilization.

CONSUMER CONFIDENCE INDEX - Thursday, Dec. 27, 10 a.m. EST

Consumers probably felt more downbeat in December. The Conference Board's index of consumer confidence is expected to decline a little further after falling to 87.4 in November, from 95.2 in October and 99.5 the month before. Outside of the 2005 hurricane-related plunge in confidence, the current reading is the lowest since 2003 as well. Americans also see business conditions worsening and an erosion of labor market conditions.

While consumers are feeling glum about current conditions, they have expressed a drastic change of perception about the future. The expectations index fell to 68.7 in November, from 94.4 back in July. Looking ahead six months, far more respondents see worsening business conditions, fewer jobs, and declining incomes.

If consumers are as downbeat as recent sentiment readings show, it could negatively impact the crucial holiday season. However, the relationship between consumer confidence measures and actual spending haven't had a particularly strong correlation in recent years.


The Chicago-area National Association of Purchasing issues its December Business Barometer report. The November headline reading rebounded to 52.9%, after falling to an eight month low of 49.7% in October. A level below 50% indicates a contraction in output.

Amongst individual categories, production, new orders and employment readings all bounced back in November. The pickup in new orders contributed to a smaller decline in unfilled orders for November.

At the same time demand improved, higher energy and commodity prices drove the price paid index to its highest level since July of 2006. More than 50% of respondents said they paid more for supplies and raw materials, vs. just 5% who said they paid less. Along with a few other factory surveys and the November gain in manufacturing output, this report offers some reason to believe conditions for manufacturers are getting steadier.

NEW RESIDENTIAL SALES - Friday, Dec. 28, 10 a.m. EST

When the December report is released, economists expect it to show yet another monthly decline. In October, sales rose to an annualized pace of 728,000 homes, after hitting a nearly 12-year low when September sales were revised down to 716,000.

The increase in October was driven by a gain in the South and an odd 14.2% jump in the Midwest. Another possible reason to downplay the October number is the fact that this report does not include buyers backing out of deals. That's still occurring frequently now, with some home builders reporting cancellation rates above 30%.

The stronger pace of sales did help cut into the large overhang of unsold single-family houses. The October number of 516,000 was the smallest total since December of 2005. Even so, there are enough new homes listed to cover 8.5 months worth of sales at the October pace. That's still a very elevated level, which points to further price cuts, especially by builders that are short on cash.

HELP-WANTED INDEX - Friday, Dec. 28, 10 a.m. EST

The Conference Board releases it November index of help-wanted ads. The index slipped to 23 in October, from 24 in September, and 29 a year ago. Along with the deteriorating index, help-wanted advertising declined in all nine regions of the country. According to Conference Board economist Ken Goldstein, the economy and labor market are responding to the headwinds of weaker home buying and construction, higher gas and food prices, and tighter credit conditions.

The Conference Board's tracking of November online job ads fell 2.1% on a monthly basis, after a decline in October. The yearly growth in help wanted ads online, however, did pick up to 9.7%. These figures are not seasonally adjusted, making the yearly comparison the more reliable measure of activity. The number of advertised vacancies online for every 100 persons in the labor force slipped again, to 2.65, from 2.71 in September and 2.78 in the prior month.

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