Home Sales Spur Stocks

Record new-home sales offset a weak durable goods report.
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Surging new-home sales helped the market erase earlier weakness, which followed the weak July durable goods orders.

Sales of new homes soared to a record in July, rising 6.8% from June to an annual rate of 1.41 million units. The sales increase brought the inventory-to-sales ratio to four months, the tightest since October. Wall Street economists on average were expecting sales to fall slightly to 1.33 million units in July.

This was good news for the shares of homebuilding stocks, which have been pummeled since late July and fell again

Tuesday on news that existing-home sales fell more than expected last month.

The Philadelphia Stock Exchange Housing Sector Index was recently up 2%, after falling more than 10% since late July. Shares of homebuilding star

Toll Brothers

(TOL) - Get Report

were recently up 4.3%,

Pulte Home

was up 3.5%

(PHM) - Get Report

, and

KB Home

(KBH) - Get Report

was gaining 3.2%.

The housing report helped the broad stock indices overcome earlier weakness after the Commerce Department said orders for durable goods -- which include everything from washing machines to computers and aircraft -- fell a larger-than-expected 4.9% in July.

After trading as low as 10,485 early in the session, the

Dow Jones Industrial Average

was recently up 0.4%, at 10,558.67. The

S&P 500

was up 0.5%, to 1224.11 and the

Nasdaq Composite

was up 0.9%, to 2151.43. The Comp was aided by strength in

Google

(GOOG) - Get Report

, which

unveiled a new instant-messaging and voice-chat service.

Bonds, which have been buoyed recently on expectations that surging energy prices will crimp growth, dipped slightly Wednesday. The benchmark 10-year Treasury bond was recently down 2/32 and its yield rose to 4.19%.

Undoubtedly, the housing market remains red hot. Still, there were perhaps more signs that it is close to the beginning of the end of the housing bubble. For one, the sales surge was mostly in the West, where sales soared 36%. Sales in the East rose 10%, but they fell sharply in the Midwest and fell back in the South.

"This really looks like a market in the throes of panic," says Joel Naroff, chief economist with Naroff Economic Advisors. "People are getting in before prices hit levels that they cannot afford."

Still, many economists predict that the end of the bubble will take place slowly, as air slowly lets out. For now, that's taking shape via a stabilization in prices, which by itself, could crimp consumers' faith in ever-rising home prices.

In July, the median sales price of new homes fell to $203,800, the lowest median sales price since December 2003 while the median price is down 4% since July 2004 and down 8.6% year-to-date.

In between two monthly reports on housing, it's worthwhile noting that even David Lereah, the chief economist of the National Association of Realtors and author of the book

Are You Missing the Real Estate Boom?

, conceded earlier this month that U.S. home sales are close to a peak. He predicted that by next year, prices would rise at about half the rate of 2005.

That doesn't mean that homebuilders are going to go bankrupt. And as shown by the lean inventories of unsold new homes in July, homebuilders are trying to keep a tight control of supply. But homebuilding shares are unlikely to find new fuel to continue the surging they have seen over the past three years. "Worries about an overextended market are taking hold," says Naroff.

And rightly so. With increasing signs that consumers are increasingly feeling the pinch of surging gasoline prices, even stabilizing home prices could further dampen spending. A slowdown in overall economic activity is not good for the housing market.

Core Slowdown

Although the durable goods orders is often volatile, and economists don't like to draw conclusions until several months of data, the July report sure didn't look good.

Economists on average were expecting orders to drop 1.5% in the month. But the headline numbers were hit by a 16.6% drop in defense and a 20.2% drop in commercial aircraft.

But core orders, which exclude aircraft and are often a good indicator of business spending, also fell 3.7%. While overall orders have been on the mend for the past several months, indicating a rebound in manufacturing activity, orders in such categories as computers, communication equipment and machinery have declined since May, notes Wachovia chief economist John Sylvia.

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"Yes, in the short run, I do believe higher energy prices and interest rates have had and will continue to slow order growth in the next six months," he says.

Also on Wednesday, crude oil rose again, adding 49 cents to $66.20, still lingering right under its all-time high of $67.10.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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