U.S. Existing Home Sales Weakness Accelerates in the West

As of last month, the Northeast had seemed to stabilize. So had the Midwest. In the South conditions had still been easing but with a hint of flatness month/month in July. But in August the South saw sales fall again and the West saw the bottom fall out of an already weak market. The drop off in the West is simply stunning. It is the largest drop in this episode of declining sales. What we find is that sales have pulled back sharply in this period when mortgage availability came into question in the middle of the financial sector mortgage-led melt down. Since Jumbo mortgages were one of the products at issue in this mini-crisis, it is not surprising to find that the West, California’s region where the jumbo mortgage is also the norm, is the region that is most affected in August. The Midwest and Northeast are still under pressure, the South appears to see a continued and fairly ongoing fall off, but the West is a disaster.

The Northeast and Midwest are holding their year/year declines to about 10%, the South is off by 13% but the West is now down by nearly 22% year-over-year.

While the median price has slipped to $224,500, that is an erosion of only about 2.5% from its recent peak. The problems so far do not seem to be crushing home prices. The home sales market is doing its usual thing which is to become less liquid and to maintain house prices.

We now see vast regional differences in terms of what has happened over the past year. The West, the region with the highest home prices has been hit the hardest. But the Northeast with the second highest prices has been the most insulated. The seize-up is simply not just about high-priced homes.

The Northeast is more fully developed and probably has less competition from tracts of new homes. Plus inflows of monies from nonresidents have helped to prop up prices in some the East coast housing markets giving them some resiliency.

Summing Up:Still the facts are clear and housing is in the soup. The financial mess has had spillover into the house sales market - not surprisingly. The report was weak enough to inject new life into the bond market where the price of bonds had been selling off since the Fed started its easing process. The question markets are grappling with now is how weak is the economy really and how far will the Fed choose to go? There is tension between those thinking that the Fed will overdo it since economy is not really that weak and those who think that the economy is weak and will need more help. For the moment stocks are assuming that there will be growth from one channel or another. The macro picture is muddied by the GM strike that could weaken things a lot more if that strike drags on.

With the September Conference Board report we have a bit more of a dilemma on our hands. While the August job report was very weak as the month went on consumer confidence did not weaken from its earliest readings which were themselves weak. Both the weekly consumer comfort gauge and the preliminary University of Michigan report showed a firming in confidence that has continued. Now, in September, we get a big drop in confidence, the second in a row from the Conference Board measure. Neither the University of Michigan preliminary reading nor the weekly consumer comfort reports are in early agreement with this weakness. Moreover, the weekly jobless claims are lower despite the fact that the Conference Board report is supposed to be more labor-market centric than the others. We are left to ponder which of these reports really has the pulse of the nation and which of them has glommed onto pulse of the family dog.

The range data on the detailed components of the Conference Board index show us that this weakness is fairly widespread across expectations in the report.

Expectations are the weakest readings residing in the middle of their range at the 48th percentile. The present situation comes out in the top 25 percent of the range - nearly the top 20%.

Between the two present situation readings, the business conditions response is the weaker in its range at the 53 percent mark while employment is near the top 30% of its range.

Among the expectations components both the business and employment indexes are weak in their respective ranges, bottom 35% to 40%. But income, a more stable component, is holding up in the top third of its range.

The planned spending components are exceptionally weak. Plans to buy an automobile are in the bottom 15% of their range; plans to buy a house are in the bottom 5% of their range.

The Conference Board reading is weak. It is at its weakest point since an unusually sharp drop late in 2005. Since other measures have not gone along with this one, we will want to watch closely if the Conference Board is isolated or just early in its report of weakness.