Property Grunt

Wednesday, April 04, 2007

A tale of two markets

On Tuesday the market jumped from joy from new housing data.

NEW YORK (AP) -- Stocks surged Tuesday on signs of resilience in the housing market and the U.S. consumer, with falling oil prices giving investors an extra reason to rally. The Dow Jones industrials gained more than 120 points to reach a five-week high.
The National Association of Realtors' index for pending sales of existing homes rose in February at a seasonally adjusted annual rate of 0.7 percent. The index is well below where it was a year ago but stronger than investors expected, reassuring them that the housing sector, while weak, is not being pummeled by the struggling subprime mortgage sector.

Fears that lending problems will spill over into the rest of the economy have been a major factor behind the market's volatility of the past several weeks. The uptick in home sales was slight but came as a pleasant surprise to investors who had been bracing for the worst.

"That says people are getting mortgages, people are buying houses, people have incomes, jobs, all that good stuff," said Kim Caughey, equity research analyst at Fort Pitt Capital Group. "You'd never go out and buy a house if you think you're going to get laid off. Consumers are optimistic about the future, and as we all know, the consumer drives this economy."

As I was perusing the real estate news sites, I came across this report from Inman News.

An index that tracks pending home sales dropped 8.5 percent in February compared to the same month last year and rose 0.7 percent since January, the National Association of Realtors reported today.

The Pending Home Sales Index
, which is based on signed contracts for sale transactions that have not yet closed, reached 109.3 in February. An index of 100 is equal to the average level of contract activity in 2001, which was the first year to be examined and the first of five consecutive record years for existing-home sales, the association noted.

Regionally, the index fell 9.7 percent in the Midwest, 8.2 percent in the West and Northeast, and 8 percent in the South in February compared to February 2006.

David Lereah, NAR's chief economist, said in a statement that "unusually bad weather in February" may be a factor in the index. Also, he said, "We also may be seeing some fallout from a decline in subprime lending. Problems in the subprime mortgage market will become more apparent over time, and they will modestly depress the overall level of improvement in existing-home sales we expect as the year progresses."

The index is based on a national sample that typically represents about 20 percent of transactions for existing-home sales. In developing the model for the index, the association demonstrated that the level of monthly sales-contract activity from 2001-04 parallels the level of closed existing-home sales in the following two months.

Confused? As was I until I walked over to The Big Picture which gives the rundown on why Wall Street may have prematurely popped their wad on this news.

Let's put aside for the moment the source of the data -- the National Association of Realtors (NAR) -- and delve into the data itself:

The Pending Home Sales Index, based on contracts signed in February, stood at 109.3 – down 8.5 percent from February 2006 when it reached 119.4, but is 0.7 percent higher than a downwardly revised reading of 108.5 in January. Earlier, mild weather caused the index to spike at 113.3 in December."

So from January to February, real estate contract signings to buy existing homes appear to have increased 0.7%. This is measured by the NAR’s "index of signed purchase agreements." Year-over-year, the contract signings dropped 8.5%, hardly an encouraging data point, but that small fact didn't seem to slow down the woefully misinformed pundits one bit. The monthly data was an improvement from January, which suffered a month-to-month drop of 4.2%.

So what does this small monthly gain mean? Let's go to the NAR release:

"An index of 100 is equal to the average level of contract activity during 2001, the first year to be examined and the first of five consecutive record years for existing-home sales. There is a closer relationship between annual changes in the index and actual market performance than with month-to-month comparisons. As the relatively new index matures and seasonal adjustment factors are refined, the month-to-month comparisons will become more meaningful over time." (emphasis added)

Bloomberg notes that “The existing-home sales report is based on a sample of about 40 percent of transactions in the multiple listing service used by real estate agents, while the pending-sales index [the one we are presently discussing] covers about 20 percent.” That's right -- this 0.7% monthly gain is extrapolated from one out of five contracts. And as the NAR notes themselves, the year-over-year changes is much closer to reality than the month-to-month measure.

So back to our punditry: What does this data -- a major negative, according to its source -- have to do with yesterday's rally?

Most likely nothing.

The inimitable Bill King points out that if any of the T-Heads bothered checking the overnight futures activity, they would have seen very clearly that the markets were being bought up way prior to the 10 am news release:

"A cursory look at a SPM chart reveals that the rally started just before Europe opened in the
wee hours of Tuesday. Yes, that is the window when people tend to commence gaming of the SPMs.

The second wave of the rally commenced about 7AM ET. The third wave of the rally started just before the 10AM ET release of the Pending Home Sales number."

The following chart is courtesy of King, who points out all the fun was had long before the 10 am release

Bill adds:

"After the early rally, stocks traded sideways, amid excruciating ennui, for the balance of the session.

The rally, due to lack of later follow through and vigor, appears to be the handiwork of someone, or more, that exploited this week’s high absenteeism and lack of enthusiasm.

Ain’t high finance grand?"

At this stage of the game it appears that Wall Street will take any positive development, no matter how minor, as an opportunity to create momentum. But will it be enough?