Last week, a leading gauge of U.S. home sales showed surprising strength. April pending home sales rose 6.3% from March to an 88.2 index in April, the highest level in six months, the National Association of Realtors reported.
More encouraging economic news was forthcoming from the retail sector, where sales rose twice as much as forecast in May, as Americans snapped up electronics, clothes and furniture, evidence that they aren't hoarding their tax-rebate checks or using them just to buy gasoline. (Indeed, sales excluding gas increased 0.8%.)
Still, signs of economic weakness persist. Bank repossessions more than doubled and foreclosure filings rose 48% in May, according to RealtyTrac, which also reported that one in every 483 homeowners lost their house to foreclosure or received either a default warning or notice that their home would go up for sale at auction.
A surge in consumer prices was another sign of continued weakness. The consumer price index increased 0.6% in May, the most since November, after a 0.2% gain the prior month. The recent surge in oil and food prices has caused traders to bet that the Federal Reserve will increase interest rates as soon as September, following seven rate reductions in the past nine months.
Increasing inflation concerns also sent mortgage rates higher last week. The prime 30-year fixed-rate mortgage rose 26 basis points to 6.52%, while the prime 15-year fixed-rate mortgage rose 28 basis points to 6.12% and the 5/1 adjustable-rate mortgage rose 27 basis points to 6.07%, according to Bankrate.com's weekly survey.
Economic |
Release |
Consensus |
Analysis |
Housing Market Index |
Mon. June 16, |
20 |
Important. The index has been building a base over the past month, suggesting the worst might be over for homebuilders. |
Housing Starts |
Tues. June 17, |
975,000 |
Important. New homes sales are stabilizing on heavy seller discounts. |
Producer Price Index |
Tues. June 17, |
All Goods: 1.2% (Increase) |
Very Important. Energy prices could ignite another round of inflation. |
Industrial Production |
Tues. June 17, |
0.1% |
Moderately Important. The expected decrease should have little impact on credit markets. |
State Street Investor Confidence Index |
Tues. June 17, |
82 |
Important. The recent rise in the index suggests investors are more willing to take risks. |
Mortgage Applications |
Wed. June 18, |
None |
Important. A 10% spike in applications means lower home prices are enticing buyers into the market. |
Leading Indicators |
Thurs. June 19, |
0.1% |
Moderately Important. The indicators aren't expected to show any change in the current economic outlook. |
THANK GOODNESS FOR BOTTOM FEEDERS
A recent report by Lehman Brothers estimates that foreclosures will account for 30% of national home sales this year, as another 1.2 million foreclosed single-family homes enter the market.
The large Wall Street firm estimates that foreclosed properties, which typically sell for about 20% less than other homes, will depress overall prices another 6%.
The Lehman Brothers report is discouraging on first glance, but not so much on subsequent glances. The glut of foreclosures and sales discounts will be temporary, thanks in large part to a growing number of bottom-feeding investors.
Financial news publications are featuring more stories of enterprising investors earning a living flipping foreclosed houses.
These same outlets also note that more large institutions are entering the market. On that front, Blackstone Group recently raised $11 billion to make bulk purchases of residential distressed property.
More investors are also sniffing around beat-up homebuilders' and mortgage lenders' stock. ESL Investments, a well-respected firm that controls $11.6 billion in investments, recently began picking up shares in some of the housing and mortgage sectors’ hardest-hit stocks, acquiring shares of Centex Corp., KB Home, CIT Group and PHH Corp.
On the one hand, foreclosures are rising, but on the other hand more investors are snapping up distressed properties. The other hand is bringing stability to the market, which will in turn produce more buyers and higher prices.
