Weighing The Week Ahead: What’s Up With Housing?

Once again, this week’s economic calendar is very light. There will be plenty of political news and daily doses of FedSpeak. Despite the political stories, I expect the punditry to be asking:

What is happening with housing?

Prior Theme Recap

In my last WTWA (two weeks ago) I predicted a focus on the US Presidential election and the possible implications for financial markets. That was a good guess, with these stories remaining at the forefront of news through two weeks, not just one. Last week included the expected news about the Fed even though the expected news was no real policy change! Doug Short notes the post-Fed rally, as you can see from his excellent weekly chart. (With the ever-increasing effects from foreign markets, you should also add Doug’s weekly chart to your reading list).

Doug’s update also provides multi-year context. See his weekly chart for more excellent charts and analysis.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

This Week’s Theme

The economic calendar is light and the U.S. has a four-day trading week. The President’s trip to Cuba and South America will make news, but probably not financial news. Daily servings of speeches from Fed participants will provide plenty of material for those who always see that subject as most important.

Despite this competition, I expect attention to the role of the housing market in the current economy. Employment remains strong. Auto sales are solid. Retail sales are good. Business investment and housing remain the biggest economic question marks. At one point both were a real drag on economic growth. More recently the effect has been flat rather than negative. With some key data released this week, I expect pundits to be asking: What’s up with housing.

Background

Calculated Risk is the “go to source on housing” according to Paul Krugman. For those who are not fans of Krugman, I have said the same thing many timesJ Bill called both the top of the housing market in 2006 and the bottom in early 2012. Very few can claim that distinction. His blog has become a top source for coverage of economic news, earning widespread respect. We should be paying attention to his perspective this week.

Viewpoints

Those bearish on the housing market (and often on the economy and stocks in general) frequently cite the following points:

Increasing housing prices strain the affordability for new buyers;

Increasing interest rates also hurt affordability;

Many homeowners are underwater on mortgages and cannot sell or buy;

Demand is lower because of millennials staying at home or choosing to rent;

Homes held in foreclosure proceedings or by speculators provide low-priced competition;

Home sales are low because there is insufficient supply.

Those who are bullish observe the following:

Interest rates remain at historically low levels, helping affordability;

The price rebound has helped many to build home equity;

We can expect increasing purchases from young people;

The foreclosure and speculative sales are less significant than a few years ago;

Increased home prices enable some to sell – trading up or even sideways to take new jobs.

As always, I have my own opinion in the conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.

It is better than expectations.

The Good

There was some good news last week, but it was only marginally positive.

The Fed Decision was – as usual – unpopular with many, but was celebrated by markets. There was no policy change, but the guidance suggested a slower pace of future rate increases. Those who believe that the Fed has no tools left might want to read former chair Bernanke’s latest blog post. (He has some favorable observations about negative interest rates).

Retail sales missed expectations a bit on the headline, but beat on the core rate. See this week’s Silver Bullet award for more detail.

Inflation data moved toward a more normal range. The core rate has been about 2%.

Housing starts climbed. The single family annualized rate was 822K, the best since November, 2007. (Bloomberg)

Jobless claims remained low at 365K. Staying in this range means that relative few are losing jobs, but we still need job creation.

JOLTS data showed continued strength in job openings and the quit rate. (BI)