Wall Street Greek: GDP & Home Sales Confound

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GDP, Home Sales Confound

Investors were stumped this past week by mixed messages on the economic front. However, upon closer inspection, a common theme ran true. A duet of unsustainable economic drivers pushed both GDP and recent positive existing home sales data. The market seems to have caught on though, and investors are pulling on the reins. The Dow Jones Industrials (^DJI, NYSE: DIA, NYSE: DOG) pulled back by 2.6% on the week, while the S&P 500 Index (^GSPC, NYSE: SPY, NYSE: SDS) dropped 4%.

New Home Sales were reported down 3.6% in September, and measured well below economists' expectations. The report offered confounding information for those who have been following the housing market. The New Home Sales slump contrasted vividly against the prior week's report of strong Existing Home Sales (+9.4%) for the same month. So which data point is telling the truth? Is housing stabilizing or is it about to take another shot to the gut?

The clear difference between Existing and New Home Sales is of course foreclosures, or the absence of them within the New Home Market. Their existence in the much more significant pre-owned home market has pushed overall pricing downward, while also speeding the recent sales pace within the segment.

When reported, most interpreted the sharp increase in Existing Home Sales as the beneficiary of the expiring incentive provided by the First-Time Homebuyers Tax Credit. The theory goes that those who could afford a home purchase now, were rushing to enjoy the tax benefit before its end of year expiration, and we are sure this is the case to some degree. However, first time homebuyers are allowed to buy new homes just as soon as existing properties, so why the drop in new home sales then? Well, that question tells us something more.

Maybe government incentives are losing their punch. Perhaps we should face the fact that in the end a new normal is going to rule the day. Credit standards have tightened, and so the growing American home ownership rate, which characterized recent times, might stall for a long while to come. I do not believe a jobless recovery is possible when the jobless rate is as high as it is now. The unemployed and under-employed are certainly not qualifying for mortgages anyway. At the very least, any economic growth in the short-term should not be robust.

GDP Robust?

Most "gurus" would not venture out on a limb like that given Friday's GDP report that showed a return to economic growth in the third quarter (+3.5%), and a sharp bump up at that. But, while GDP looked good for Q3, "cash for clunkers" will not a recovery make, in my view. Motor Vehicle Output added 1.66 percentage points to GDP in Q3, and auto sales have evaporated since. Inventory build, a more important driver, was not significant in Q3; and that factor would be expected to provide a quarterly kicker, before a step back into recession (or rather negative change in GDP) for another quarter. Given consumer spending appears to be giving way to consumers hiding in their basements for the winter, economic recovery might lag a bit longer than the President might expect.

In conclusion, a boost in sales that is supported by foreclosure activity, and a drive in GDP that is supported by unsustainable stimulus, is not making me jump for joy given still deteriorating unemployment.

Note: Housing stocks took an especially big hit last week, with Toll Brothers (NYSE: TOL) dropping 9.7%; Hovnanian (NYSE: HOV) down 9.1%; Lennar (NYSE: LEN) -10.8%; D.R. Horton (NYSE: DHI) -11.8%; K.B. Homes (NYSE: KBH) -10.3%; and Beazer Homes (NYSE: BZH) off 13.1%.