Be Prepared for Softening of US Housing Data

Tertiary reports are warning of renewed weakness in the US housing sector. Today the NAHB Housing Market Index was reported. This little watched survey of home builders tracks present sales, 6-month sales expectations and traffic of prospective buyers (of single family homes). The index ranges from 1 to 100. It most recently peaked in Sept 09 at 19. NAHB reported today that its index slipped to 15 from 16 in December. It has not risen since Sept and is back to where it was in June.

On January 5, the US reported as 16% drop in Nov pending home sales, which pushed the year-over-year rate to 19.3% from 28.7% in Oct. It portends weakness in existing home sales.

Tomorrow Dec housing starts and permits data are due. The consensus expects little change from the 574k and 589k reported in Nov for starts and permits respectively. The risk seems to be on the downside, however the tertiary reports suggest the downside risk may be even greater with next week's (Jan 25) existing home sales. Owing in part of low mortgage rates and some incentive for first time home buyers, existing home sales have been rising steadily to a 6.54 mln unit pace in Nov from 4.72 mln unit pace 6 months earlier.

Existing home sales have risen every month since March 09 save one (Aug). Pending home sales leads existing home sales by around 1-2 months. Therefore the risk is for an outsized Dec loss, which in percentage terms could be among the largest during this cycle.

New home sales (Dec) will be reported on Jan 27. If there is an iota of strength it may be seen in this report. Nov's 11.3% decline was a bit too large for this time series and some bounce should not be surprising. However, new homes sales peaked in July at a 419k pace and is not likely to be approached for at least a few months. It is possible that the Q4 average comes closer to the Q2 monthly average of 371k than the Q3 average of 406k.

However, the risk of weakness in the housing sector should not obscure the fact that the US economy appears to have expanded robustly in Q4 (Jan 29th). The consensus has crept up with recent data and now stands around 4.5% and some houses are looking for a 5-handle. This is in contrast to Germany which appears to have slowed and the UK which is expected to post it first expansion quarter since Q1 08 (Jan 26th).

The transmission mechanism through which strong economic data supports the dollar is often via Fed expectations. Even if Q4 GDP has a 5-handle as some of the optimists suggest, and accepting that by the time the Fed meets on Jan 26-27th, it will have a good idea of the report, it is unlikely to spur the market into bringing forward the first Fed hike, which seems to have been pushed into the later part of Q3, according to the Fed funds futures strip.