March 05, 2004

Supply Outpacing Demand, Mind the Gap

If HGX is enjoying a money-market fund juiced blow off, it's happening despite the fundamentals in the housing market, which ought to be a source of unease to traders, but of course, are not. Just what do the supply/demand fundamentals look like right now? We turn to our favorite off-shore macro magician Greg Weldon for some numbers. Greg tells us: *Median Existing Home Sales Prices were down 3.5% in January. Weldon adds, "prices have risen in only ONE month out of the last six months, over which time existing home sales prices have posted a cumulative nominal decline of 7.1% *"In other words, (median) Prices of Existing homes sold since July (of last year) have plummeted at more than a -15% annualized pace, falling from a peak of $181,600 in July to the current level of $168,700 (January) *"Sales are down since September, cumulatively, and are FALLING one a year-year basis in one-half the country, while prices have fallen on cumulative basis since July, and are below the full-year 2003 average. It's not much better in the new home sales category, as Greg reports. *"New home sales down 1.7% in January, marking the fourth month of cumulative decline in the last seven months, during which time the cumulative decline is a STEEP minus 7.4%, or a nearly 15% annualized pace." The demand side is clearly slowing. Yet the supply side is building. The supply of new homes available for sale has risen for six consecutive months, from 3.5 months available supply in August of '03 (based on robust demand mind you) to 4.1 months in Jan. of '04. Greg says, "Bottom line: DESPITE a rabid pace of home sales, sales are now FALLING over the last six months, and in some regions, are falling on a year-year basis. Against this, the ever more rabid pace of starts and completions is driving supply higher, at a double digit rate on a year-year fact, we could say that the yr-yr rate of UNSOLD HOME SUPPLY is breaking out the upside." Greg says the U.S. housing market in both its technicals and fundamentals is "rolling over." I agree. What will be interesting, and imperative to our trading strategy, is what the effect of a docile Fed is on the mortgage and homebuilding market. Based on these numbers, even low interest rates--historically at that--might not be enough to keep the big engine that could chugging along. Then again, there's the simple issue of a liquidity driven bull market. It doesn't have to make sense. In fact, in can even defy the fundamentals. And homebuilders may rise. But you can't spit in the fundamental wind forever, without getting plastered in the face.


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