Fisher Investments Editorial Staff
Others

Distorted Housing’s a Drag

By, 08/25/2010

Story Highlights:

 

  • Sharply falling July home sales added to the list of weaker-than-expected US economic data on Tuesday, further fanning fears of another recession.
  • It's difficult to know precisely how homes sales were distorted by the homebuyer tax credit and what demand will look like going forward.
  • Housing could recover, continue along the bottom, or fall further, but unless other powerful drivers reverse course, that won't necessarily imperil recovery overall.  

______________________________________________________________________ 

 

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

 

Sharply falling July home sales added to the list of weaker-than-expected US economic data on Tuesday, further fanning fears of another recession. A sharp decline was expected following a June 30th closing deadline for the homebuyer tax credit. Though that deadline was extended to September 30th, the bulk of sales likely closed in May and June. What worried investors more was that the -27.2% drop greatly exceeded the expected -13.4% decline.

 

It's difficult to know precisely how homes sales were distorted by the credit. (So it goes with government intervention.) Demand that would normally have been spread out over months was accelerated (demand-pull) as folks rushed to act sooner than planned. July's decline likely outstripped expectations on a combination of weaker underlying demand (absent the tax credit) and stronger demand-pull than forecasters assumed. The tax-credit distortion makes it equally hard to judge demand going forward—just how many weeks or months of transactions were fast-tracked is anyone's guess. If demand remains weak, housing could be a drag on recovery.

 

But we mustn't forget other powerful forces pulling in the opposite direction. US business spending was strong in Q2 and is set to keep up that pace in Q3 on growing profitability and balance sheet liquidity. With 97% of S&P 500 firms reporting, profitability is set to grow over 30% for the third quarter running.* Further, big firms are positioning themselves for future growth and global demand. Mergers and acquisitions are up, most notably in Tech (a $7+ billion deal for McAfee) and Materials (a rejected $40 billion bid for Potash Corporation—pending a better offer from other bidders). All this is happening in front of a backdrop of decreasing political risk—see yesterday's cover story for more on the rise of global governmental gridlock.

 

Housing could recover (great!), continue along the bottom, or fall further (a negative), but unless other powerful drivers reverse course, that won't necessarily imperil recovery overall.

 

* Thomson Reuters, "This Week in Earnings" 8/20/2010.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.