INDICATOR: December Existing Home Sales and Leading Indicators
KEY DATA: Home Sales: +1.0%; 1-Family: +1.9%; Condos: -5.9%; Prices (year-over-Year): +9.9%/Indicators: +0.1%
IN A NUTSHELL: "The surge in home sales is over and we should be getting back to a more normal market."
WHAT IT MEANS: The decade of boom, bust and boom in the housing market is nearing an end. Whether it was irrational exuberance or massive pessimism, nothing about the residential real estate market was normal over the past decade. That may finally be changing. The National Association of Realtors reported that existing home sales edged up in December. That may sound good but November's rate was downgraded and the December gain was minimal. Declining demand in the East and Midwest was offset by strength in the South and West. The last two months of the year were the weakest for the entire year as sales trended downward from their peak in July and August. That said, sales did jump over nine percent in 2013 and were the highest in seven years so I doubt most realtors will be crying. As for prices, they were up nearly double-digit for the year and with inventories extremely lean, decent price gains should be sustained. However, don't expect them to be anywhere near what we saw in 2013. The increases are moderating and the Federal Housing Finance Agency reported that its index rose a modest 0.1% in November.
In other news, the Conference Board's Index of Leading Indicators edged up in December but it had soared in November so this is actually a decent report. Anytime you can consolidate a strong gain, take it and run. Also, jobless claims were up minimally but the level is consistent with strong job gains. Indeed, I expect the January payroll increase to bounce back sharply from December's disappointing level.
MARKETS AND FED POLICY IMPLICATIONS: Housing has turned around and in 2013 it helped lead the way. But double-digit increases are not sustainable and we really don't want bubbles to form again. The housing sector is far from bubbling over and with mortgage rates likely to move up this year, sales and price gains will likely be about half of what we saw last year. And that is actually good, as it would signal a return to more normal conditions in the market. Investors will probably be indifferent to today's numbers as they are fully involved with earnings. With so much bull(ishness) flying around the markets, any disappointing numbers will probably raise some real warnings. As for the Fed, the level of claims points to a solid jobs report and that would confirm what most economists think: the December report was just one of those oddities that occur periodically. I suspect that the FOMC will continue to taper, as long as everyone manages to thaw out and make it to the two-day meeting that starts next Tuesday.