A Weak Pretext for an Overdue Correction

 We finally seem to be getting the correction we've all been waiting for.  The stage was set by that long, drawn-out "gosh, does this thing have an intermission?" symphony of feel-good announcements that reached a crescendo with the Fed's meeting notes on Wednesday afternoon. Twenty or so minutes later, though, the thought kind of sunk in, "Okay, now what's gonna make stocks go up?" and indices quickly showed us how badly this young Bull needed to take a breather. The improving unemployment claims report the next morning sent the Bears scrambling, but this only lasted until the report on existing home sales came out. This particular statistic is about as shaky a figure as you can hang an excuse to buy or sell on, but in the Market's present condition it was good enough to get the correction back underway.

The headline "reason" that the Market rolled over was a surprise 2.7% drop in existing home sales, to a seasonally adjusted 5.1MM. This was said to be a "surprise" because it had been up for four months in a row. Understanding just how weak a pretext for a sell-off this is starts with the "seasonally adjusted" element of the statistic. Its been more than a few years since I did so, but if you take a peek at what goes into seasonally adjusting activities like home sales, you will know how foolish it is to put any weight on a single data point (unless the change is a whole lot bigger than 2.7% of the annualized level of activity). There is simply not enough actual information in this "data" to tell if home sales are actually slowing down. 

Even if we grant some validity to the statistic as an indication of slowing, this should hardly be a surprise. I can think of two things that should be happening right about now that should be like a tap on the brakes for home sales. The first is that we are probably reaching the end of what was a buyers' market of a lifetime for housing. Beyond what amounts to subsidized mortgage rates and the tax credit for first time buyers, we also had legions of despondent sellers sitting on a mountain of inventory. Down another 10.8% in August, to a not unreasonable 8.5 months supply, the glut isn't what it used to be. It is probably not unthinkable then that at least a few sellers are no longer dancing a jig at the thought of someone, anyone, making an offer on their cash sucking albatross. As a market becomes less distressed, we should expect at least some transactions to drag out to include negotiation between parties who are on much more equal footing than it seemed six months ago. It is, no doubt, still a buyers' market in most markets out there, but "desperate and highly motivated" is becoming at least a little fewer and further between.

It is also likely that the rate at which home sales close has slowed because the real estate industry probably got caught flatfooted by the recovery. This industry (think of it as all those purportedly indispensable folks who seem to line up with their hands out when you want to buy or sell an home) had to shed a lot of capacity in a hurry last year. Should we be surprised that a genuinely surprising upsurge in the number of folks looking to re-finance or maybe take a flyer on a re-po or whatever caught them by surprise? So maybe by August it took longer to close a deal than it did before the recovery started getting noticeable. A few extra days for loan approval would definitely move the needle on a thirty day period of activity, even without the effect of annualizing.

So throw in the bonus thought that maybe Cash for Clunkers soaked up a bit of buying power, or at least consumer "bandwidth",  and we should hardly be surprised if the recent fire under home sales cooled a bit in August. A sane and experienced individual would not dump equities because of this bit of non-news, but a Crowd certainly will. We have seen even weaker "reasons" than this one "explain" inflection points. The aforementioned symphony of encouraging news has indeed taken a brief intermission. You do not want to be out in the lobby when the music starts up again.