Existing Home Sales Lowest Since 1998, Prices Off 10% Since Peak

According to the National Association of Realtors, sales of existing single family homes slipped 2.0% during December after a very slight 0.7% uptick in November. The decline was to the lowest level since 1998 and since the sales peak in late 2005, sales were down by roughly one third. For the full year sales fell 13.0% on top of a 7.7% decline in 2005.

Sales including condominiums fell 2.2% last month and ended the year down 22.0% from last December, down 12.8% for the full year.

By region, home sales in the Northeast fell 4.6% (-22.4% y/y) and for the full year were off 7.5% after the 6.9% 2006 drop. In the Midwest December sales fell 1.7%, 10.6% for the full year, while sales in the South ended the year with a 1.0% drop. Combined with a 2.0% fall in November overall sales in the South last year fell 13.0%. The worst of it came out West. The 2.1% December decline pulled sales for the year down 19.2% after a 16.2% drop during 2006. For the full year, sales of single family homes in the West was the lowest since 1998.

The median price of an existing single family home fell 0.4% (-6.5% y/y) in December. It was the fifth m/m decline in the last six months. It lowered prices for the full year 2.8% below the 2006 level, the first full year decline in the thirty five year history of the series. Since the peak early last year, home prices were off 9.9% in December.

Perspectives on Housing and the Economic Outlook from the Federal Reserve Bank of Kansas City can be found here.

The latest Budget Outlook from the Congressional Budget Office is available here.

Initial claims for jobless insurance remained unexpectedly low last week. A 1,000 w/w decline followed sharp declines during the prior three weeks which now have totaled 15.7% since the high one month ago. The latest level was the lowest since September.

Initially, this drop in claims was doubted as genuine due to the difficulties of seasonal adjustment during the Holiday season. Those difficulties suggested that claims would bounce up last week. Indeed, a rise to 320,000 had been the Consensus expectation. No special factors were sighted by the Labor Department as having influenced last week's figure.

The four week moving average of initial claims, a measure which smoothes out most of the series' w/w volatility, fell sharply to 314,750 (+0.7% y/y). It was the lowest level since mid-October and may suggest that recent labor market weakening was not as great as earlier perceived. But in a wishy-washy spirit, the perception should not be wholly dismissed based on the new figures.

A claims level below 400,000 typically has been associated with growth in nonfarm payrolls. During the last six years there has been a (negative) 78% correlation between the level of initial claims and the m/m change in nonfarm payroll employment.

Continuing claims for unemployment insurance dropped 75,000. It reversed a 59,000 increase during the prior week which was revised down slightly. The figure provides some indication of workers' ability to find employment but here again difficulties of seasonal adjustment this time of year are great.

The continuing claims numbers lag the initial claims figures by one week.

The insured rate of unemployment fell back to 2.0% from 2.1% during the prior week.

Monetary Policy Implementation Frameworks: A Comparative Analysis from the Federal Reserve Bank of New York is available here.

Japan’s exports show a withering trend as Japan’s imports continue to rise at a brisk pace. Export and import price indexes, however, show that export volumes are being maintained better than the nominal figures tell us as export prices are falling and falling faster than nominal exports are shrinking. Imports on the other hand are not as strong as nominal figures show since prices are rising sharply. While imports are up by 37% in the past three months from August to November, import prices rose by less at 35.8% for October through December. As a result Japan’s nominal trade figures give exactly the opposite impression of what is going on.

Nominal imports are rising, while real imports are actually slowing. On the export side nominal exports are falling, but export volumes are in fact still expanding. Rising oil prices are creating a misdirection in terms of import trends. For exports, the rise in the yen accounts for the drop in export prices. The yen’s rise tends to result in a reduction of yen export prices, as though exports are denominated in foreign currency. Volume still seems to be rising, but if this is a currency effect it could be a warning that profits for exports are in for a set back.

Bounce raises the question of EMU-US de-coupling.

Apparently Germans agree… They agree with the ECB that weakness does not threaten Germany or Europe and they see better times ahead as the IFO expectations index that looks six months into the future rose enough to kick the climate index higher. No wonder Axel Weber, Bundesbank president, was saying that markets do not understand the ECB and are too driven by short-term horizons. Weber, in comments today, hinted that the next ECB move could be to tighten, not to ease as markets had expected just yesterday.

These events raise the question of whether markets have de-coupled or whether either Europe’s or the US central bankers are just plain wrong about the outlook. Can Europe be so strong that it may need to tighten if the US is as weak as all the fiscal and monetary stimulus in train seem to expect? Or is Germany and the ECB simply wrong in their outlook? Or is the Fed and Congress wrong and just too wrapped up in the needs of US short-term presidential election year politics?

We can’t tell here and now, but time will tell.

The respondents to the IFO survey did see somewhat weaker current conditions, but not much weaker. At a value of 107.9 the current index is still in the top quartile of its range. It slipped by just 0.2 points in January, less than in December. It is still well above its average value of 95.0. It is lower year/year by 4.2%, less than the 6.2% drop registered on that basis in December.

Business expectations improved by 0.8% in Germany. This propelled the overall climate index up to 103.4 from 103.0 in December. Expectations are still lower by 4.1% Yr/Yr less than the 4.3% drop registered in December. But the IFO survey is hardly a report ringing warning bells in the ears of the ECB.

The overall EU index for Germany had already slowed its rate of descent in December. Now the IFO actually has improved. We seem to have a decoupling in progress if the actions of the ECB and the Fed are each correct. The question is: are they?

Italy shivers while the Euro Area overheats: What good can come of this?

Not only is PM Prodi having a difficult time, but so is the Italian consumer. Whatever fate awaits Prodi, the consumer is already giving a vote of no-confidence to it. This is despite some resilient data from elsewhere in the Euro Area. The German IFO index actually rose in January. The ECB is thinking of hiking rates according to some of the day’s commentary. If you are an Italian consumer however, you must wonder if the world has gone mad. The Euro Area may be coming into one of its really big tests. Inflation has run hotter in some EMU countries than in others. But because of the single currency there has been no relief for competitiveness. There is no local currency to depreciate. Italy is one of those regions.

Since all EMU countries are pent up in the same currency area, what will affect competitiveness within the Zone, as well as between the Zone and other areas that is nationally different, is the local inflation rate, as well as any productivity differences. The small table below shows that since March of 2000 Finland is the most competitive EMU nation with a national price index that is some 7.2% below the EMU average for that period. Germany is next at -4.2%. Italy ranks as seventh worst among the 12 countries ranked here with a price level that is 1.2 percentage points ABOVE the EMU average. That would make Italy some 5.4% less competitive than Germany for the period and 8.4% behind Finland. Ranking below Italy is The Netherlands, Luxembourg, Portugal, Ireland, Spain and Greece.

If Italy’s problems are due to that sort of competitiveness loss we should also find encroaching weakness in those lower ranked countries as well.

For now, whatever the source, Italy’s consumers are feeling the pinch. Confidence is in the bottom 20% of its range. The current overall situation is in the bottom six percent of its range. The expected overall situation in the next 12 months is the worst in this period. And so on, see the percentile column in the table above. The Italian household sees things as being bad, and as getting much worse. It is no wonder Prodi is having trouble, and it will be a real test of European unity to see what happens in Italy if the ECB goes ahead with the rate hikes that the Bundesbank’s Weber was warning of today.