Experts Talk New-Home Sales, Durables, Fannie and Freddie

By BusinessWeek staff

Data from the housing sector continue to provide pleasant surprises for Wall Street and Main Street. An Aug. 26 report showing a jump in U.S. new-home sales for July followed on the heels of reports released the previous day showing a month-over-month increase in a widely followed measure of U.S. home prices in June.

What did market pros have to say about the housing data—and other important market and economic topics—on Aug. 26? BusinessWeek compiled comments from Wall Street economists and strategists:

Michael Englund, Action Economics

U.S. new-home sales posted a hefty 9.6% surge to a 433,000 [unit annual] pace in July, following upwardly revised levels over the prior three months. The figures continue to climb from an unrevised 329,000 cyclical [low point] in January. The sales bounce over the past six months leaves a clear trough for nearly all the major housing measures in the first quarter overall, with a January bottom for this measure that matches most indicators.

Today's sales gain chased last week's similar 7.2% existing-home sales surge to a 5.24 million July rate, which left this sales measure well above the January [low point] of 4.490 million and at its strongest pace since August 2007.

The price data from today's report revealed a tiny 0.1% July median new-home price drop, to $210,100, that followed upward prior revisions that left a 5.0% (revised from 5.8%) June drop to a $210,400 (was $206,200) figure. The July drop allowed a decline in the year-over-year measure to -11.5% from -10.2% (was -12.0%) in June. We are still adhering to a pattern of diminishing price declines from the -14.5% year-over-year cyclical trough in February, despite the July price downtick. Prices are now at the end of their usual spring seasonal bounce, and we expect the median price level to moderate into yearend …

For further supportive news for housing, inventories of new homes fell again, to 271,000 units in July from 280,000 in June, 293,000 in May, and a cyclical peak of 572,000 in July 2006. Though high inventories remain a problem for home builders, the month's supply measure is falling—to 7.5 in July from 8.5 in June, 9.7 in May, and a cycle-high of 12.4 in January. Since the months' supply measure is a ratio that responds to both falling inventories and rising sales during the turn in the cycle, this measure is falling sharply now that sales are bouncing, vs. the stabilizing pattern evident earlier in 2009.

Beth Ann Bovino, Standard & Poor's

U.S. durable goods orders rebounded 4.9% in July, the strongest reading in two years. The number was much better than the 3.0% bounce expected by markets and comes after a 1.3% drop in June (upwardly revised from -2.5%). Transportation orders jumped 18.4%, with civilian aircraft orders surging 107.2%, to explain much of the boost. Excluding transportation orders, orders edged up 0.8%, after a 2.5% increase in June.

Nondefense capital goods orders, excluding aircraft, a leading indicator for future capital spending, edged down 0.3%, but after surging 3.6% in June and 4.3% in May. Shipments were up 2.0% after climbing an upwardly revised 0.7% in June (previously -0.2%). Inventories fell 0.8%, bringing the inventory-shipment ratio to 1.81 from 1.87 in June.

The upbeat data should give further support to stock prices and weigh on Treasuries [on Aug. 26].

Alec Phillips, Goldman Sachs

While the Treasury continues to provide financial support for the GSEs (government-sponsored enterprises Fannie Mae and Freddie Mac), the Administration is likely to develop plans soon for dealing with the GSEs over the longer term. This will probably involve two steps: (1) moving the GSEs onto the federal budget and (2) transitioning the GSEs to a new structure.

Moving the GSEs on budget would increase the share of federal debt as a share of GDP by roughly 10 percentage points, but would not fundamentally change the federal debt burden from where it is today. A new GSE structure seems likely to involve partial nationalization; privatization and a public-utility model are other plausible alternatives.

Bringing the GSEs on budget, if it occurs, is unlikely to happen before next year. Moving the GSEs to a new structure may be proposed next year, but will take several years to implement.

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