Tuesday, August 24, 2010

Existing Home Sales Hit Already Nervous Market

Equity markets were off to a rough start, nervous about the existing home sales number, even before the actual data came along to make matters worse. Existing home sales plunged 27.2% to an annual rate of 3.83 million in July, a number much worse than anticipated. Also, the lowest level in 15 years. Inventories leapt to a 12.5 month supply, up from the previous month's 8.9 months. Bad news all around.

Before everyone goes into a giant tizzy about the sky falling, let's just contemplate what exactly this number means. As the always enlightening Calculated Risk pointed out yesterday in a post by economist Tom Lawler, it was impossible to understand given how horrible the pending home sales index had been, the expiration of the tax credits in June, and huge fall-offs in activity in many local markets, how on earth economists had arrived at such an optimistic consensus forecast of a mere drop of 10%. So really, had economists done a better job of forecasting, nobody would've been surprised by this horrendous economic number. Then again, bad economic forecasting or not, the number still stinks.

What does this mean? Bad economic news points to deflation which leads the nervous nellies at the Fed to buy more treasuries, mortgages, whatever it takes to reflate assets, which doesn't actually get rid of housing supply, instead just leads to pockets of inflation, say in commodities, which leads to takeover battles for fertilizer companies (see Potash) and niche tech firms (see 3Par.) See? It really is all so predictable...

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