KEY DATA: Sales: -7.8%; Over-year: -1.0%; Median Prices (Over-Year): +2.4%

IN A NUTSHELL: “Builders may be exuberant, but sales don’t seem to be supporting that attitude.”

WHAT IT MEANS: If you believe the National Association of Homebuilders, happy days are here again. The NAHB index is at a level that was exceeded only during the peak of the dot.com era. It was not even this high during the best times of the housing bubble. Housing starts were fifty percent higher than they are now. Yet in January, sales of new homes declined for the second consecutive month. There were sharp drops in sales in both the Northeast and the South. I can almost understand the 33% fall off in the Northeast. There was exceptionally cold weather, at least early in the month. However, I am not sure why demand fell by double-digits in the South. On the other hand, sales soared by over 15% in the Midwest, but rose minimally in the West. In other words, this is a report that shows no real pattern. Meanwhile, prices rose only modestly over the year. Builders are bringing more homes on to the market. Indeed, the number of homes for sale is the largest in nearly nine years. However, when adjusted for the sales pace, inventory is still not high, even with the recent backing off of contract signings.

MARKETS AND FED POLICY IMPLICATIONS: There are always strange housing numbers that pop up because extreme weather conditions occur randomly. A blizzard that hits in January could have easily happened in February. Bitter cold weather or massive rain, as we have had this year, changes the ability to get shovels in the ground or for buyers to visit sites. So don’t take the two consecutive months of declines in purchases as a clear signal the housing market is faltering. That said, both new and existing home sales did decline in both December and January and now we are facing rising mortgage rates. Yes, they are still relatively low, but they are the highest in four years. An upward trend in rates should be forcing some buyers to jump off the fence. I guess the increase has not been enough to cause any great stampede. I suspect that we will see a very strong rebound when the February numbers come out, especially since the weather, at least in the Northeast, has been incredibly mild. Even though that report will not be released before the next FOMC meeting, I don’t expect this report to deter any Fed member from voting in favor of a rate hike. As for investors, it appears it will take a push to above 3% in the 10-year Treasury note to create any real anxiety – if it actually does do anything to the exuberance currently in the equity markets. Right now, we have fifteen basis points to go to get there. If 2.85% is the new normal, it shows that an acceptable long-term rate is a moveable target. Don’t be surprised if 3% comes and goes in a similar manner. And we could get there fairly soon.