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Housing Bubbles


There are virtually no signs of weakness in the housing sector. Aggregate sales data along with results from individual homebuilders continue to outpace estimates. Data released on Monday revealed that home buying continues as the national past-time. New home sales dropped slightly to an annualized rate of 1.145 million homes. While the pace of sales has dropped by 55,000 homes from the peak in June 2003, Septembers pace was the third highest on record and 20,000 higher than economists predicted. Existing home sales were even stronger. The 6.69 million annual rate in September was a new record. A Bloomberg article discussing existing home sales put the strength into perspective with the follow statistic, "For the first time ever, the pace of sale for three straight months has exceeded 6 million, 50 percent above the 1990s average."

There has been quite a bit of debate over whether or not there is a housing bubble. One more piece of the puzzle to consider is whether people are "trading" houses more than before. The chart above shows the housing turnover on an annualized basis. There have been numerous anecdotal stories about homeowners "flipping" their houses recently. The latest data on home sales shows that housing turnover is at record highs. This was calculated by dividing existing home sales by total number of housing units. The amount of housing turnover previously peaked in 1978 at just under 5%. As interest rates exploded in the late 1970s and early 80s, home sales fell by 50% before bottoming in 1982. Starting in 1983 the turnover rate started to be consistent between 2.8% and 4% until 1998. After stabilizing around 4.3%, the turnover jumped to about 4.8% last year and this quarter soared to 5.5%. While home sales have been strong for several years, this provides further evidence that it has reached an extreme level.

(There was a revision of the total housing unit's data following the 2000 Census. This revision lowers the number of total housing units, which resulted in the turnover increasing roughly 0.2 percentage points.)

On Tuesday, more economic data pointed to a growing economy. Durable goods orders increased 0.8%, which was below economists' forecasts of 1.0%, durable goods orders excluding transportation were 1.2%, stronger than the 1.1% forecast. While September order pointed to a growing economy, the market focused on the revisions to August data. August durable goods orders were revised from -0.9% to -0.1% and excluding transportation, orders increased 0.7% from a previously released decline of 0.3%. Additionally, ex-defense orders increased 2.6%, the highest growth rate since June 2003. Computers and electronics orders increased 2.6%, which was the fourth consecutive month of 2.0% or better growth.

Consumer confidence increased 4.1 points to 81.1 in October according to the Conference Board, higher than economists expected. While the headline number was not spectacular, it remains below August's reading, the present situation component increased for the first time since April. Most notable was that employment is getting better through the eyes of consumers. There are five questions that focus on employment, all showed improvement. Those that thought jobs were not plentiful fell to 54.4%, which is the lowest since September 2001. The outlook six-months out is even rosier. Those expecting more jobs will be available jumped 3.1 points to 19.7%. This is the highest degree of optimism since June 2002. Even thought more consumers are expecting more jobs to be created, most continue to see pressure on wages. Only 16.7% expect income in increase and 10.9% expect income to decline. Lastly, it appears consumers were waiting for the new model year automobiles to be introduced. Last month, those anticipating purchasing a vehicle fell to eight-year lows.

Perhaps the biggest non-event of the week was Tuesday's FOMC meeting. Since nobody expected the Fed to change the target Fed Funds rate, the focus was on the wording of the FOMC statement. Last week, Treasury Secretary Snow suggested that higher interest rates would be indicative of a strengthening economy and should not be a cause of concern. There was a chance that this would start the process of priming the market into anticipating higher rates in the future. But that clearly was not the case. The Fed maintained that "the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future" and "that accommodation can be maintained for a considerable period." In fact, the only passage that changed from the September release was the statement regarding the labor market. In October, employment "appears to be stabilizing" compared to "weakening" in September. Unfortunately, this accommodative monetary policy is flooding the world with US dollars. Basic economics dictates that an increase in supply without a corresponding increase in demand will cause the price to drop. This is what is happening to the dollar, which recently grabbed the attention of Warren Buffet. In the next edition of Fortune, Buffet said that starting last year he purchased foreign currencies for the first time in his life.

After Tuesday, the focus shifted to Thursday's release of third quarter GDP. Economists are now forecasting 6.0%, just a few weeks ago it was 5.2%. As long as GDP grew faster than 5.0% in the third quarter it will be the fastest rate of growth since hitting 7.1% in the fourth quarter of 1999. If it happens to eclipse 7.1%, it will be the fastest pace since 1984. Of the 73 estimates comprising Bloomberg's survey there are four estimates that are 7.1% or faster. Usually this rapid growth would cause interest rates to rise, but as detailed above, the Fed is hell-bent on keeping rates low.

Corporate earnings have continued at the same pace. With about 75% of companies reporting third quarter results, 65.6% have bettered analysts' estimates with only 12.9% coming short. One negative surprise was from Sonic Automotive. Sonic earned $0.66 per share in the third quarter, $0.15 below analysts' estimates. The auto dealer said that, "domestic branded dealerships, particularly Ford and Chrysler/Jeep/Dodge, sharply under performed." I did enjoy the following quote from a Raymond James report discussing Sonic Automotive's third quarter results. "We continue to believe higher valuations, rising expectations, and risks to the fourth quarter do not present an attractive risk-reward for investing in auto retail stocks. We therefore maintain our Market Perform rating on Sonic." My only guess is Raymond James expects the market to sell off over the next couple months.

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