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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (34839)	6/27/2005 11:20:39 AM
From: ild	Respond to of 110194

Berson's Weekly Commentary Economic Commentary June 27, 2005 Will home sales actually slow this year (part 2)? The main topic of the Economic Commentary of May 16th was a discussion of the pace of home sales and whether or not sales would climb to yet another record in 2005. Since then, the Census Bureau and National Association of Realtors (NAR) have released new data on home sales -- and we have updated our forecast of home sales. We now expect sales to end up at least at the record levels that we saw in 2004. There is now a good chance that 2005 will be the fifth consecutive record year for home sales. The most recent home sales figures continue to show that the pace of activity is above last year's record pace. According to NAR, existing home sales in May edged down -- but the first two months of the second quarter were the strongest months ever for existing sales. Through May, existing sales are almost 6 percent above their year-ago record pace. The Census Bureau just reported that new home sales climbed by 2.1 percent in May to the second highest seasonally adjusted sales pace ever (after October 2004). As a result, new home sales are running 4.5 percent above 2004's record pace -- and total home sales are up by 5.5 percent from last year. In addition, the recent decline in interest rates has brought yields on 30-year fixed-rate mortgages down to around 5.60 percent. As a result of this, purchase applications in the Mortgage Bankers of America's (MBA) weekly applications survey have surged in June to the highest monthly average level ever -- and since the survey index is for the previous week's activity, the next reported number should be up again, corresponding to the most recent decline in interest rates. The MBA purchase applications are the best near-term (1-2 months) indicator of home sales that we have, and they are telling us that there should be no meaningful slowdown in home sales through August. Even that is a conservative reading of the applications data, as the further increase in June could presage even stronger sales over the summer. In the middle of June -- before the most recent home sales and MBA applications figures were released -- we raised our forecast of 2005 home sales to one that was essentially equal to 2004's record level. Given the most recent data, however, we may have been conservative with these projections. At this point, with no sign of a slowdown in activity and the future indicators pointing to perhaps a further acceleration, the balance of the risks to the home sales forecast are on the high side -- meaning that it is more likely that home sales in 2005 will be above our recently updated projections than below. In turn, this suggests that the odds of a fifth consecutive record year for housing have risen substantially. Moreover, single-family housing starts should respond to the record or near-record sales by also turning in an all-time high. Thus far in 2005, single-family starts are 5.2 percent above the same period last year -- making it very unlikely that starts this year will fall short of last year, as long as sales stay strong. Responding to the continued record pace of sales, home price gains continue to be very strong as well. While we still expect some deceleration in the rate of home price appreciation this year, we now look for a drop to only around 7 percent (from nearly 11 percent last year). Combining the new forecasts for sales and prices, we now project that purchase originations will rise by almost 8 percent to an all-time high of $1.41 trillion. This will be a busy week for economic indicators, especially on Thursday and Friday. On Tuesday, the Conference Board's measure of consumer confidence is expected to edge up to around 104.0 for June -- the highest level in four months. On Wednesday, the revised estimate for first quarter real GDP growth should move up a tad to 3.7 percent -- bringing growth for the quarter up to the trend for the past year, after initially being reported as weaker. On Thursday, personal income and spending for May is projected to grow by 0.3 and 0.1 percent, respectively -- after three consecutive months of fairly strong spending. Also on Thursday, initial unemployment claims are expected to rise to around 325,000 for the week ending June 25th -- the average for the past four weeks, after a surprising drop last week. Additionally on Thursday, the Chicago Purchasing Managers Index should be little changed at 54.5 for June -- suggesting additional manufacturing expansion in the Mid-west. Also on Thursday, the Conference Board's help wanted index is expected to rise to 40 in June -- little changed over the past four months, but up from a year ago. On Friday, construction spending for May is projected to climb by 0.5 percent -- with widespread gains in most sectors. Also on Friday, the Institute for Supply Management's (ISM) manufacturing survey index should be little changed at 51.5 for June -- showing continued modest increases in manufacturing activity. Additionally on Friday, the University of Michigan's final estimate of consumer sentiment for June is expected to slip just a bit to 94.5 -- mostly because of higher oil prices. Finally, on Friday, domestic vehicle sales for June are projected to edge up to an annual rate of 13.5 million -- with all of the gain coming from autos (as light truck -- SUVs, minivans, pickup trucks, etc. -- sales should have been unchanged in the face of higher fuel prices). David W. Berson Fannie Mae Economics fanniemae.com