U.S. stocks failed to follow through on Tuesday’s our-problems-are-solved rally even as tech-sector profits continue to knock the cover off the ball.  The big news from Tuesday was the view that the so-called Gang of Six came up with a debt-ceiling/budget plan that the White House liked, but by the time we opened yesterday reality began to set in as the House showed its disdain toward the idea.  (I continue to believe that a debt-ceiling deal is a done deal by the deadline of August 2, although more window dressing than real tax and entitlement reform, but as yesterday a compromise took a turn for the worse.)

And just to further comment on that parenthetical, there are all kinds of things involved with a technical U.S. default.  One of the major items is that banks borrow from the Fed during times of stress and they use U.S. Treasury securities as collateral.  Unless the Fed is just going to ignore that these formerly “risk-free” securities would be trading at junk status on a default event – and I’m not even willing to say the central bank will go there yet – then you’ve got no lender of last resort.  This is just one of the major reasons there will be a debt ceiling deal. 

The shares of Steve Jobs rallied yesterday, but failed to drive the market, or even in a more narrow sense the tech sector, as the company, which trades under the ticker AAPL, posted another blowout quarter.  Steve Jobs Inc. currently trades at a market cap of $358 billion, which puts it just behind Exxon Mobil ($411 billion) as the largest company in the U.S. 

Consumer discretionary, tech and staples led the broad market lower.  Financials, utilities and industrials managed to close higher yesterday.

The CRB index closed fractionally lower as the prices of half of its components fell during the session.  But not oil and wholesale gasoline, they gained ground yesterday – the national average at the pump is $3.69 this morning. 

Market Activity for July 20, 2011

Sector Activity for July 20, 2011

Mortgage Apps

The Mortgage Bankers Association reported that their applications index jumped 15.5% last week, but unfortunately it was completely driven by refinancing activity. 

The overall index halted a four-week slide as applications to refinance a mortgage surged 23.1% in the week ended July 15 as the average contract interest rate on the 30-year fixed mortgage held at a really low level – dipping one basis point to 4.54%.  However, the much needed purchases were flat (down 0.1%) after the prior week’s 2.6% decline.  Apps to purchase a home are down 12.9% since April.

 While the glut of distressed homes on the market contributes to this dearth of mortgage apps to purchase a home (more houses are simply bought with cash), the number of cash transactions (about 30% of existing home sales right now) is not enough to absorb the supply of homes. 

Existing Home Sales

Sales of previously-owned homes fell slightly in June, according to the National Association of Realtors (NAR), as the number came in at 4.77 million at a seasonally-adjusted annual rate (SAAR).  That was down 0.8% from the 4.81 million in May – the number was expected to rise 1.9% to 4.90 million.  Cash transactions accounted for 29% of all transactions, according to the NAR, which is about where it’s been running for several months now.

The overall decline was driven by the 7.0% drop in condo/co-op sales as single-family units were flat (0.0%) following two months of decline.  I think it’s safe to say that the selling season for 2011 is AWOL --  it’s barely better than the 2009 buying season (and I mean barely, averaging 4.86 million homes SAAR compared to the 4.78 million in April, May and June of 2009.

Analysts believed sales would rise in June because the pending home sales data rose 8% in May (which is usually a harbinger of official sales for the subsequent month).  However, 16% of contracts signed were canceled; the writing on the wall is the appraisals aren’t matching up with the selling price, which as we’ll get to below strangely jumped in June.

All of the charts below are single-family only as it allows a longer look – including the condos/co-ops only allows the data to go back to 2000.

The supply figures deteriorated as the number of existing homes available for sale rose 3.3% to 3.765 million. And that’s just the official number; the shadow inventory may double that figure.  According to Lender Processing Services, a total of 6.35 million homeowners were behind on their loans at the end of May, with 2.16 million in the foreclosure process. 

And relative to the pace of sales, it would take 9.5 months to sell those homes, up from 9.1 months in May – a healthy market has roughly 6.0 months worth of supply.

So these supply numbers went in the wrong direction, which shouldn’t’ come as a surprise when you see the price of a previously-owned home nonsensically jumped in June.  The median price rose 8.9% for the month, up $15,000 to $184,300 – get ready for more declines because this makes zero sense. 

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