Tuesday, 27 July 2010

Rise in US new home sales helps stocks erase year's losses

A report on Monday showed that new home sales in the United States in June were at their second lowest on record but stock prices, including those for homebuilders, were up by the end of the day.

The Census Bureau reported that sales of new single-family houses in June were at a seasonally adjusted annual rate of 330,000. This was the second lowest rate since records began in 1963.

However, June sales were 23.6 percent above the downwardly-revised May rate of 267,000. It was also better than the median projection of 310,000 obtained from a Bloomberg survey of forecasters.

Also importantly, the number of new houses for sale continued to decline, falling to 210,000 at the end of June on a seasonally adjusted basis. Combined with the jump in home sales, the new home supply fell to 7.6 months of sales in June from the upwardly-revised 9.6 in May.

The new home supply provides an indication of future demand for homebuilding. The surge in May had appeared ominous when it was announced last month.

However, the subsequent decline in June suggests that the May spike was the result of a one-time reaction to the expected expiry of a government tax credit for home purchases causing sales to plunge that month. The underlying trends in new home sales and supply are probably more favourable and supportive of an eventual, albeit gradual, recovery in home construction and the housing sector in general.

Investors apparently took the optimistic view. US stocks rose on Monday, with the Standard & Poor's 500 Index rising 1.1 percent to 1,115.01 and the Dow Jones Industrial Average rising 1.0 percent to 10,525.43. Homebuilders did well, as did transportation stocks after FedEx raised its earnings forecast.

Monday's gains mean that the Dow Jones Industrial Average is now back in positive territory for the year, having risen 0.9 percent since the end of 2009. The S&P 500 is essentially flat for 2010.

In pushing stocks up on Monday, investors downplayed other data that showed that the nearer-term outlook for the US economy may not be so bright.

A report from the Chicago Federal Reserve on Monday showed that its National Activity Index fell to –0.63 in June from +0.31 in May. Three of the four broad categories of indicators that make up the index, including production, made negative contributions in June.

The weakening in economic activity looks likely to continue in the near term, at least in Texas. The Dallas Federal Reserve reported on Monday that its general business activity index fell sharply to -21 in July from -4 in June. The report said that while the production index rose from -2 to 5, indicating output expanded in July, the new orders and growth rate of orders indices fell deeper into negative territory.

Still, investors have probably already discounted the near-term weakness for the economy, so the data on new home sales, which is indicative of the longer-term outlook for the economy, would understandably have been seen as a positive.

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