KEY DATA: Sales: +0.9%
IN A NUTSHELL: “With households signing contracts to buy homes at a growing pace, we should see even better housing sales in the months ahead.”
WHAT IT MEANS: The housing market just keeps getting better. The National Association of Realtors Pending Home Sales Index, a leading indicator of existing home sales, rose solidly again in May. The index is up over 10% between April 2014 and April 2015 and has clawed its way back to its April 2006 level. For the first five months of the year, pending home sales were up by a very solid 7.3%. The May increase was not spread evenly across the nation. The Northeast, which has been lagging, had the best gain. There was also a solid rise in pending sales in the West. However, there was a slowdown in activity in the South and the West. Still, except for the Northeast, the three other regions have shown strong increases in activity over the first five months of the year compared to the same period in 2014.
Texas has been hit hard by the decline in energy prices but the free fall may be ending. The Dallas Fed’s Texas, while still negative, moved up solidly in June. Declining output in the oil patch has cast a pall on the industrial production numbers nationally and if slowdown is fading, that should lead to better national manufacturing data.
MARKETS AND FED POLICY IMPLICATIONS: All eyes are on Greece right now so almost any U.S. economy except the most important ones are likely to be put aside by investors. Why anyone should be shocked if Greece defaults is beyond me, but I have said the same thing about the Fed raising rates. Markets may be efficient, but not necessarily rational. And that is important to remember when it comes to Fed policy. The housing numbers are showing that this sector is getting better. To the extent that rising prices will bring forth more supply and ultimately even more sales is good, at least for a while. On Thursday we get the June employment report and that is likely to be very good, though not as strong as the May one. A decline in the unemployment rate to 5.4% would put it almost at the Fed’s full employment level. Another good gain in wages would show that the tight market is doing what it should be doing: Allocating scarce labor resources through the pricing mechanism. Rising incomes imply that consumption should improve even more going forward as well. In other words, by the end of this week, it should be clear that the U.S. economy is strong enough to absorb a rate hike. So, should the Fed try to save irrational investors who have decided to wait until they see a Greek default or a Fed rate hike before doing anything? I may be in a minority believing they shouldn’t, but investors have had the information to make rational portfolio decisions for quite a while now and it is not the Fed’s job to bail them out if they don’t do that. We talk about moral hazard and the Fed should not keep creating additional moral hazard. Boy it is good to get that off my chest. Basically, I think the Fed should start raising rates and stop acting as the not so invisible hand covering up for irrational investors in the equity, bond, currency, housing and whatever other market it is supposed to be protecting.