Fed, Housing Tops in Week Ahead
By Tony Crescenzi
Street.com Contributor
3/16/2007 3:37 PM EDT
Although the same could be said about most weeks, the housing market will be sharply in focus in the week ahead, with attentions directed at three prominent monthly reports on the health of the housing sector. Focus will also be on the policy statement that accompanies the Federal Reserve's policy meeting on Wednesday.
The focus on housing will begin on Monday with the release of the National Association of Home Builder's monthly Housing Market Index, an index based on the sales, traffic flows, and sentiments of the nation's home builders. The NAHB's index bottomed last September at 30 and stood at 40 in February (readings below 50 indicate contraction).
Expectations are for the index to fall to 38. The following day will see the release of housing starts, which have plunged much more than sales; a rebound is hence expected, particularly because building permits exceeded starts by 160k in January, an unusual condition. Low levels of housing starts will force GDP forecasts downward but are necessary in order to help reduce the housing industry of excessive inventories.
On Friday, data on existing home sales will be released. The number of unsold existing homes is running about 1 million above normal, making the spring selling season critical to the housing situation. Expectations are for sales to fall 146k units to a 6.30 million pace following a jump of 190k units in January. Additional information on housing will be available Wednesday with the release of mortgage applications, which will help shed light on the extent to which the washing out of sub-prime borrowers is already factored into demand statistics. Mortgage applications have been stable of late.
Aside from housing data, there is literally only one other monthly economic report--the index of leading economic indicators, a very low grade report to the financial markets scheduled for release on Thursday. I would continue the focus on credit statistics, particularly the Federal Reserve's weekly data on bank loans, as well as corporate bond issuance and credit spreads. Also, with weather conditions having improved from February, any lack of rebound in weekly store sales readings would be telling, especially given the earlier occurrence of Easter this year.
As for the FOMC meeting on Wednesday, the Federal Reserve is likely to maintain its bias toward raising interest rates and refrain from direct commentary about the sub-prime mortgage market. Any mentioning of the sub-prime market will serve to validate concerns about the issue given the Fed's role as overseer of the banking industry. Questions such as "what does the Fed know that we don't know?" would result from any direct remarks on the sub-prime dilemma. At the January 31st FOMC meeting the Fed described the economy fairly positively, saying:
"Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters."
If the Fed's opinion has changed from January, the change would be too recent for the Fed to consider changing its bias. Moreover, the Fed's opinion about inflation may actually have worsened since the January meeting given high readings on inflation reported since the meeting and continued gains in commodity prices. Here is how the Fed characterized the inflation situation in January:
"Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures."
Any softening of the Fed's stance would likely drive long-term rates upward, something the housing market can obviously do without. Inflation expectations are already high, as evidenced by the market for inflation protected securities, which on Friday was priced for the consumer price index to increase at a 2.42% pace over the next ten years, just one basis point below a 6-month high. Oddly, then, the housing market is currently best served by continued vigilance from the Fed, which will keep long-term rates on a downward plane, helping to bolster sales and rid the housing sector of bloated inventories, the sector's biggest problem.
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