Replies to post #225 on David's Trade Journal

[david_3011]

Your Email: An Appraiser’s Comment on MLS Membership

David, I have been trying to follow you with moderate success. Since you like to look at the whole picture, I would like to advise you of the following.

I am an appraiser member of the Mid-Florida MLS. Most appraisers I know are not paying members and access the MLS on line using other's codes. That is coming to a halt August 15. After that the security (which I could explain if you are interested) will deny them access - no pay, no play. It seems to me that lots of appraisers will be joining the MLS in the next six weeks or so in order to maintain access. I don't know about other areas of the country, but if they make similar security arrangements, the number of Realtors should show a big increase without a concomitant increase in the number of real estate sales people. That would surely skew your analysis of numbers of Realtors/numbers of sales.

I just thought you should become aware of this, as otherwise the new numbers might affect your analysis in a negative way. Keep up the good work. You can never learn too much.

Till then

Tom

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David’s Note:

Thank you for your info in a well thought-out email, Tom.

The MLS membership that I’m tracking requires everyone to pay for his/her membership, and it has been like that for a long time. However, your email reminded me to point out that NOT all MLS members are real estate agents. Therefore, the number’s skewed anyway. Now, as far as being used as a sentiment indicator, I don’t think these details are all that important. It’s the long-term trend that’s important to us. One month of ups or downs doesn't make it a trend. Appraisers are part of the real estate community anyway. Besides, majority of the MLS members are real estate agents.

In addition, this is only one of the 18 indicators that I’m using for my housing market analysis. I don’t look at one indicator and jump on the conclusion with prejudice. I’ll introduce them as I see fit in the future housing market reports.

[david_3011]

David's Weekly Market Chartmentary July 4, 2005

(Happy 4th of July to everyone!)

Not So Fast

Sometimes the way to see the possibilities of the future is through the study of the past. I'd like to start by going over the correlation between the Mortgage Refinancing Volume and the Personal Consumption Expenditure.

If the stock market serves as a leading indicator of our economy, then the retail sector serves as a leading indicator of the overall stock market. And, the retail sector is directly affected by none other than the most prominent GDP component, the Personal Consumption Expenditure (PCE). As much as I care about the domestic investment, government expenditures, and net exports, the one thing that really matters most is the PCE. Based on the final 2005 1st quarter real GDP report, PCE currently represents 70.04% of the GDP. When the PCE goes, so goes the retail sector, the stock market, and the economy. But, what gets PCE going?

What gets the PCE going is the wealth effect of the housing price appreciation. The home equity is then extracted for consumption through cash-out mortgage refinancing. But, the home price appreciation alone doesn't have as much impact on the economy without the low mortgage interest rates. Low interest rates also induce rate-and-term Refi. Most of the cash-out is directly contributed to the consumption while the rate-and-term Refi is contributed to lower mortgage payments, which in turn provides additional disposable incomes. There's an undeniable inverse correlation between the interest rates and the Refi volume.

Chart 1 is the Refinancing Mortgage Application Volume based on the latest MBA report for the week ended 6/24/2005. Chart 2 is the PCE percent change from the preceding quarter based on the final real GDP report released on Wednesday, 6/29/2005. These 2 charts are not up to scale because the Refi chart is a weekly chart and the GDP chart is a quarterly chart. Nonetheless, I place a 2-quarter simple moving average curve (red curve) on the PCE chart for a better visual comparison with the Refi Volume Index curve.

The Refi volume dropped sharply from the high of almost 5,000 in March 2004 to below 1,500 in June of 2004. This contributed to the drastic decline of the PCE in the 2nd quarter of 2004 (2004Q2). From June through the end of October, the Refi activity was in a steady uptrend (blue arrow). This corresponded with the increase of the 3rd quarter PCE. And, the 4th quarter decline of the Refi volume was reflected in the lower 4th quarter PCE. Although it did pick up after the New Year, the 2-month decline of the Refi Volume in February and March contributed to yet another lower PCE for the 1st quarter of 2005.

Chart 1


Chart 2


Meanwhile, Chart 3 below shows the 30-year fixed rate went up to the 6% level while the 5.6% low appeared to be the support area (black arrow) that's going to hold for a while.

Chart 3


And, the S&P Retail Index chart below (Chart 4) also shows similar weakness at the end of March. It started to break below the bearish Descending Triangle support at 425, with further downside projection of 385.

Chart 4


With higher interest rate, lower volume of Refi application, lower PCE, and lower retail sector performance, the market and the economy certainly looked quite gloomy at the time. And, this sentiment was manifested in the rising VIX. The volatility index, VIX, which usually has an inverse correlation with the market, started ascending in March. After a brief drop in early April, it rose above 18, which was the highest level since August 2004. This corresponded with the market correction that took place in the beginning of March 2004 and lasted through April.

Chart 5


Then, something happened in April that turned everything around. The retail sector (green curve on Chart 6 below) started trending higher, after hitting the low of 390, and it took the market with it on the way up.

Chart 6


The mortgage interest rates took a sudden nose dive after March (Chart 7), and the Refi Volume surged above 2,000, which broke the February high (Chart 8).

Chart 7


Chart 8


What happened in April that suddenly provided a relief on the interest rates, a surge in Refi volume, a big boost to the consumption, and thus the stock market was the falling oil price.

The rising price of oil works against consumption as additional taxes on the consumers. However, in the beginning of April, the cyclical commodity trend indicator, Commodity Channel Index (CCI) crossed below 0 and started forming lower highs. The price of oil fell from $58.20 to $48.05 during this downtrend (red downward price channel). That 17.44% drop in the price of the crude translated to about 8%-10% drop of gasoline price at the pump. This sharp decline of the price of oil was the equivalence of the tax relief that helped turn things around. And, it also gave the consumer confidence a big boost. This was later reflected on the improved consumer confidence reports.

Chart 9


Last week, CCI dropped down from above 100 and briefly dipped below 0 for the first time since May. Despite my long-term bullish sentiment about oil, in the short term this indicates that the price of oil is ready to take a breather. One non-technical indicator of a short-term oil top is that too many people are currently too bullish on the oil and energy sectors.

In the long run, if the declining oil price is a result of the weakening demand, then lower oil price would eventually hit the "diminishing margin of return". At that point, the price of oil would have no effect on the market and the economy, even if it continues to slide. However, in the short term, the declining oil price may help keep the market and the economy afloat. And, that, I believe, is what's happening right now.

As I indicated before the opening bell on Friday that the market should continue to stay afloat on Friday despite the fact that 6 of the past 8 Fridays were down days and that the 2 previous sessions all ended in the red. The fact that the market defied the statistics on Friday was a show of such short-term optimism.

Generally speaking, barring sudden spike in the oil price, oil and the overall market doesn't have a very high degree of correlation on the daily or the short-term basis. And, that's clearly demonstrated on Chart 10 below. In the long run, however, the rising oil price does have a negative effect on the market and the economy.

Chart 10


But, one sector that has a very high degree of correlation with the price of oil is, believe it or not, the tech-heavy NASDAQ index. During the consolidation of the crude price, NASDAQ's 11.47% rise from the April/May low to the June high was the most amongst major indices.

Chart 11


And, if the NAZ stays afloat, so should the market. It's apparent that the market is not ready to go down just yet. Not so fast.