Most U.S. stock indices managed to extend their latest winning streak to four sessions on Friday, although it was a close one for the S&P 500 as it took a late-session rally just to post a fractional gain.  Shares of IBM alone basically elevated the Dow after they killed it with their earnings results the night before (too bad we can’t say that for the rest of earnings season thus far).

Financials, utilities and consumer staples were the day’s top performers.  Consumer discretionary, industrials and basic materials led the broad market lower.

The December existing-home sales report was a good one as sales, inventories and prices all improved.  And for 2011, sales increased for the first calendar year since 2004.  That’s for the official data, the unofficial reality – which includes a shadow inventory that would triple the number of homes available for sale – means it will be a while still before that market normalizes.  We get into the specifics beyond the click.

And across the pond, those negotiations between the Greek government and private investors don’t seem to be going so well as it’s been five days since an official said they were close to a deal; still no official announcement.  The talks are important for two reasons.  If they come to an agreement on the amount of a haircut (the percentage of principal investors will see returned), then it will be deemed a so-called “soft” default and thus not trigger a CDS event.  The other is that if Greece has to “hard” default, it won’t only trigger those CDS (insurance claims, for which the system probably won’t be able to pay – a la AIG) but Greece will probably leave the zone.  And with Portuguese bonds trading like default is imminent, you can bet they’ll go too.  

Market Activity for January 20, 2012

Sector Activity for January 20, 2012

This is exactly why I continue to believe a deal will be reached.  Further, investors have a reason to take the 30-35 cents on the dollar Greece is willing to pay because these bonds are trading below that level currently.  This is not to say that Greece, and later Portugal, won’t eventually leave or be thrown out of the eurozone, it just won’t happen yet.

In more comedic news, the EU is holding another summit today (I’ve lost official count but I think this will make 28 in 23 months), in which they are expected to outline the tougher rules on budget deficits.  Tougher rules eh?  We’ll see about that.

Euro-zone members have totally ignored previous budget rules, constraints that have been in place since the euro was introduced, so why should anyone belief they’d abide by them now?  Since every euro-zone country is presently in violation of the current budget deficit cap (yes, even Germany), in order to enforce any restrictions (new or old), a deep recession will ensue simply because it will mean a significant restructuring of their economies.  This has always been the reality that many people seem to be missing.  Europe doesn’t get out of this mess without deep short-to-intermediate term damage.

Existing Home Sales

The National Association of Realtors (NAR) reported that sales of existing homes rose 5.0% in December to 4.61 million units at a seasonally-adjusted annual rate (SAAR).  That beat expectations on a percentage basis, but failed to meet the absolute number of sales (expected at 4.65 million).  It beat the percentage change because the prior month’s results were revised down.

Single-family units, which account for 89% of sales, rose 4.6% to 4.11 million units last month.  (And all of the charts below are for single-family.)

The official supply figure looks very good here as the number of homes available for sale slid another 9% in December to 2.38 million units.  For single-family only, the number is down to 2.08 million.

Of course, there’s a bloated shadow supply of homes that are either 90 days late or already in foreclosure – and that number stands at roughly four-million mortgages.  The average number of days for the foreclosure process to take place is running more than 1,000 days (according to Lender Processing Services), which illustrates the number of distressed properties that have been held from the market.  At some point, these properties must roll back in and if investors’ appetite (that’s the buyer we’ll need to absorb this number) isn’t there then we’ll have a major problem on our hands.

Ultimately investors will flood in to buy homes, renting them out while they wait for price appreciation.  The question is:  What is the market clearing price to incentivize these buyers?  I think it may just be meaningfully lower than current levels.

For now though, the months worth of supply figure (inventory-to-sales) stands at 6.2 months, plunging from the 7.2 months worth of supply in November and the 9.5 months worth as of July.  It’s down to 6.1 months worth for single-family only.

Part of this reduction, however, is due to an absence of sellers, buyers alone haven’t been enough to drive the figure down like this, and that’s a result of the underwater mortgage problem as people can’t sell – they are trapped so to speak.

The median price of an existing home rose 2.3% in December to $164,500, which halts what was essentially a six-month period of decline.  For the year, the median price was down 2.5%.  We should view that one as a moral victory as distressed sales made up 33% of the total in 2011.  For single-family only, the price was $165,100 in December.

So overall these official numbers aren’t all that bad.  Yes, home prices fell last year but not by much.  Sales did rise 3.5%, which was the first advance since 2004.  And the supply numbers improved greatly.  However, there is an unofficial but very real supply issue that looms.  Without the necessary economic growth (currently running at half the average rate) that’s necessary to promote sales to levels that drive the housing market to escape velocity, we’re in for a tough couple of years still.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900