WeeklyBasis 12/24: Better Housing News & The Fine Print

Rates were up .125% last week, retreating slightly from record lows: 30yr single family home loans to $417k closed at 3.875%.

Below I recap last week’s good (and not so good) economic data, and preview the rate and stock week ahead. Scroll to ‘Bottom Line’ if you’re in a holiday rush. And I hope you get some time to sit back and relax this long Christmas weekend.

RECAP DECEMBER 19-23 MARKET WEEK

Homebuilder Confidence Best Since 2006: The index of homebuilder confidence rose for the third straight month in December to 21. Still a long shot from 50+ mark that signals a healthy market, but it’s the best since April 2006. Here’s how it looks 1985-Present.

Home Construction Jumps: Construction was up 9.3% in November to 685k (seasonally adjusted, annualized). Still below 1.5m needed to keep in line with population growth and scrappage, but highest since April 2010 when homebuyer tax credit boosted production. Excluding that one-time event, construction is highest since October 2008. Here’s the single family vs. multifamily breakdown. Building permits were up 5.7% to 681k, best since March 2010.

Existing Home Sales-Watch This Closely: November’s existing home sales were 4.42m annualized, up 4% in November and up 12.2% since November 2010. This is the highest mark in 10 months and 34% above mid-2010 low point. But NAR also revised 2007-2011 sales down 14%, tarnishing credibility of current numbers. And cancelled deals spiked again: 33% of Realtors reported at least one cancelled contract in November. Same for October, which was up sharply from 18% in September and August, and up from 9% in September 2010. I’ll be watching this EHS dataset, very interesting on many fronts.

Worst New Home Sales Ever?: November’s new home sales were 315k (annualized), 1.6% better than October, 9.8% better than year ago. This is the best since April, but well below the 700k needed for a healthy market, and 2011 looks to be the worst year ever for new home sales. Average November new home sale price: $242,900.

GDP Cut Again: The third of three GDP readings for 3Q20111 was revised down to 1.8%. Second reading was 2%, first reading was 2.5%. Like existing some sales, revisions are moving in the wrong direction.

Good News On Jobs Outlook: Claims for unemployment insurance were 364,000 for week ended December 17, down 4,000 from previous week and the lowest post financial crisis reading so far. Below 400k signals improving jobs picture and the average since 2000 is 390,000. So 1-week and 4-week numbers are trending below this long-term average: good news. More in next week’s preview below.

Inflation Flat, Again: The Fed’s favorited measure of inflation, the personal consumption expenditures index (PCE), is flat. November’s annual figures were 2.5% total and 1.7% excluding food and energy. Same story with flat monthly and annual PPI and CPI the week before last. November’s annual PPI was 5.7% total and 2.9% excluding food and energy. Annual CPI was 3.4% total and 2.2% excluding food and energy.

PREVIEW DECEMBER 26-30 MARKET WEEK

Next week’s economic calendar is light, but below are noteworthy highlights with rate impacts.

Home Prices Down Again?: Last month, Case Shiller’s September report showed home prices across 20 major U.S. metro areas were down 0.6% since August and down 3.6% since September 2010, breaking a (rather weak) five-month ’20-City’ gain streak. Tuesday’s October report will determine if the monthly figure can reclaim positive territory or not. Either way, rates won’t move much on this data.

Jobless Claims Trend: Rates didn’t rise last week despite declining jobless claims (recap above). Markets will wait for December jobs report January 6, and to see more jobless claims declines–next read this Thursday.

Pending Home Sales: Existing home purchase contracts entered into were up 10.4% in October and up 9.2% since October 2010. November figures are Thursday. This is a leading indicator of existing home sales expected to close in 60 days. But remember stat from above: 33% of Realtors are reporting cancelled existing home sales contracts. Rates don’t typically move on this report.

Stock & Bond Technicals: Looking at stocks, the S&P 500 closed at at 1265, up 3.69% on the week, ending above its 200-day moving average of 1259. Huge change from last week when it closed below 50- and 200-day moving averages, signaling a rally could continue next week. But analyst Robert Sinn warns that last week’s rally was on anemic volume and fails to meet key technical qualifiers for a run higher. As for mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—dropped 66 basis points on the week to close at 101.98. This is why rates rose .125%, and this kind of MBS drop would normally mean rates rise more but lenders held the line since MBS moves were (like stocks) on very low volume. MBS are now just 18 basis points above their 50-day moving average, a line that’s been a concrete floor of support even when stocks rally. But downside risk (pushing rates up) exists because MBS dropped below their 25-day moving average to close last week.

Bottom Line: Last week, I said “rates should be even to up .125% as MBS drop a bit and stocks rise a bit” which happened. That makes a two month roll of nailing weekly rate predictions. Now that I’ve said that, I’m sure the streak will be broken! Anyway, next week has little MBS-moving data so stock activity will drive bonds. Sentiment seems to favor a Santa rally for stocks, suggesting rates should be even to up slightly as the 25-day average on MBS is tested.