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Commentary: No News Is…

Many, many years ago, on a slow Friday in mid-August, the stock market took an unexpected tumble. There were no economic releases to blame or to cite, so analysts, who get paid to come up with reasons for market gyrations, latched on to the only explanation they could: Gillette, which was then a standalone company, had restated and lowered its earnings forecast. The likelihood that a reduced earnings forecast of a consumer products company would send the market on a downward spiral was minimal, but there it was. That was the story, and by gosh, the analysts were sticking with it.

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The other, more plausible explanation for the stock market drop on that August Friday was a combination of two factors: It came as tax filers, who had requested and received an automatic four month extension on filing tax returns (this was a long time ago; now the automatic extension is six months), had to settle with the government, and many colleges required a tuition payment for the millions of baby boomer children who would be attending school that fall. The simple explanation for why the market dropped was that stock investors had to sell because they needed the cash.

Sometimes a story just fits--and sometimes it doesn't.

Given that maxim, the explanation from the National Association of Realtors (NAR) for the drop in the ""Pending Home Sales Index"":http://www.themreport.com/articles/pending-home-sale-slip-3rd-time-in-4-months-feb-2013-03-27 (PHSI) for February has to be viewed with a jaundiced eye.

According to the NAR, the PHSI dropped because of the low inventory of homes for sale. Of course, that wasn't offered as an explanation one month earlier, when the inventory of homes for sale dropped to its lowest level since December 1999 and the PHSI increased. But when the PHSI fell in in February, _and the inventory of homes for sale increased_, the still-low inventory became a convenient excuse.

Even further, the NAR is pointing to builders as the culprit. They are not building _new_ homes and therefore there are fewer and fewer buyers for _existing_ homes.

That home prices have been falling seems to have dropped off the NAR's radar as an explanation for the dearth of inventory.

Through January, the median price of an existing single-family home--a broader measure than the ""Case-Shiller"":http://www.themreport.com/articles/case-shiller-indices-post-strongest-gain-since-2006-2013-03-26 Home Price Index--had fallen for five of the previous seven months and in January suffered the steepest monthly [COLUMN_BREAK]

decline in both dollar and percentage terms since January 2011. To be sure, the median price of an existing single-family home rose in February, but homeowners interested in selling wouldn't have known that in deciding whether to list their homes. The improvement in median price should swell inventories for March.

If anything, an increase in new home activity would have a negative impact on existing single-family homes from a price standpoint. The median price of a new single-family home in the last 12 months averaged $244,325, 37 percent higher than the $178,275 median price of an existing single-family home.

It may be true that single-family home construction is down, but single-family home completions only add to inventories. Since records for both new home sales and completions have been kept, beginning in January 1968, sales have never exceeded completions.

There are, of course, lots of differences between a new and an existing single-family home. Price may not be the determinant. One factor looming large is the basic issue of homeownership. We may not know for decades the deep impact of the Great Recession on attitudes.

To be sure, builders have already felt that impact as ""residential construction has tilted"":http://www.themreport.com/articles/starts-permits-up-in-fbe-at-4-1-2-yr-high-2013-03-19 to multi-family away from single family as they pick up on changing attitudes and preferences, similar to those which followed the Great Depression. Following the downturn of the '30s, there was a different appreciation of money and wealth such that children of the depression--even 70 years later and after they had become financially secure in their own right--would walk an extra block to save a nickel on a pound of butter and, even more, _knew_ offhand the price of a pound of butter.

Not to put analysts or institutional economists out of work, but very often the explanation for market movements is the obvious and doesn't require a lot of digging.

""Sometimes,"" as Freud said, ""a cigar is just a cigar.""
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The major report upcoming next week will be Friday's Employment Situation release, which, despite some hiccups in recent unemployment claims data, should be relatively strong. Beyond the headline numbers of job creation (expected to be close to 200,000) and the unemployment rate (likely to drop again), the other key numbers to watch will be average hourly earnings and average weekly hours. Increases to those two numbers will mean a boost to consumer demand, leading into the spiral of more goods needed for store shelves and an increase in employment.

Monday will also see an updated report on construction spending confirming trends for residential activity, leading to an uptick in construction employment.

__Hear Mark Lieberman on P.O.T.U.S. (Sirius 124) next Friday at 8:45 a.m. Eastern time.__

*_Want to write an opinion piece for publication on our site? Send your submission to_* ""MReportEditor@TheMReport.com."":mailto:MReportEditor@TheMReport.com

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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