Communications agencies are often faulted for putting positive spins on potentially dire situations. Since the end of last year, the major news media outlets have painted a gloomy picture of the housing market and its effect on the economy. We have closely watched the economic indices and their effects on the housing market and have always come to the same conclusion in this blog: that market fundamentals are in place to sustain a growing economy. This while the housing market stabilizes its inventories and the lending sector evaluates its lending practices. Here’s the update and the conclusion shows no reason for anything but to remain bullish.
The Dow Jones Industrial Average closed above 13,000 for the first time in history on April 25th. Through May 17th, the Dow is up 8.2% for the year. As of last Friday, 1129 stocks made new 65-day highs across the NYSE, NASDAQ and the ASE. This is a function of renewed strength among the small cap stocks, which had been lagging the large caps and reflects a growing confidence of investors in all market segments. When institutions are pouring money into stocks, any talk of a market correction can be quelled.
With a current price-to-earnings ratio at 18.5% and a S&P 500 ratio at 18.4%, the market does not appear to be significantly over-valued. Any major movement in the future, one way or the other, would come from an interest rate change and the latest decision by the Fed shows continued stability with caution. As a matter of fact, should core inflation remain controlled and unemployment rise slightly at the end of the year as predicted by many economists, an interest rate cut before the end of the year may materialize. This will only help clear the bloated housing inventory of large builders and bump up the economy.
In the meantime, not only does the market look healthy, the U.S. Commerce Department also reported that sales of new single-family homes increased a surprising 16.2 percent in April to a seasonally adjusted annual rate of 981,000 units. Granted these statistics are notoriously volatile, but at a minimum this reflects the efforts on behalf of the builders to reduce their inventories – a necessity for market improvement.  Also, according to the National Association of Realtors, existing home sales in the first quarter were up 2.4% over the fourth quarter of 2006 and the mortgage application rate in the first two weeks of May was the strongest since January 2006 (Mortgage Bankers Association).
Lawrence Yun, a National Assoc. of Realtors economist says, “This tells us that some borrowers who originally planned to finance with sub prime mortgages are finding suitable loans in the conventional market. This will help to stabilize home sales.”
As we have noted in other blog postings, a new housing market slump has existed for the large tract homebuilders, but other sectors of the business remain healthy. A big plus is that the downturn has made builders and lenders acutely aware of their core customer base. It has also made them rethink their business models to secure future profits. The result should be more affordable homes for more people and a move back to fair and stable lending policies. It has also created a buyers market for both homes and housing related stocks.
At K&A, we haven’t had to spin anything in this housing market downturn. The economy may not be as robust as everyone would like, but it is humming along nicely – just the way it should.