Pavlov's Dogs

The Washington Post is reporting Sales of new homes fell 6.6 percent in June

New single-family home sales fell to an annual rate of 834,000 from a revised rate of 893,000 in May, the Commerce Department said. Analysts polled by Reuters were expecting June sales to fall to an 895,000 unit pace from a previously reported rate of 915,000 units in May.

In June, the median sales price of a new home fell 1.3 percent to $237,900 from $241,000 in May. There were 537,000 new homes for sale in June, holding the same level reported in May. It would take 7.8 months to clear that inventory at the current sales pace, up from the 7.4 months reported in May.

"We need to see (housing) starts move lower," said Keith Hembre, chief economist at FAF Advisors in Minneapolis. "Not only were sales down, the homes available for sales were higher. I continue to believe that we are not anyway near the end of the adjustment in the housing market."

Key Points

• Prior months were adjusted lower (as usual)
• The magnitude of the plunge this month was huge.
• Inventory rises (as usual)
• Starts need to drop
  

Take a good hard look at point number three. Rising inventory means lower prices are coming. More subtly it means that many are trapped in homes that they cannot sell that they need to sell (because they can't meet their mortgage payments). This will increase defaults and eventually foreclosures and bankruptcies.

Now take a good hard look at point number four. Yes, starts do need to drop. A lot. That will add to unemployment. Look at the problems we are having with unemployment near all time lows. Think of the implications when unemployment rises to a mere 6%.

Treasuries are putting in a very nice rally just as the entire world hates them including foreign governments who after a huge 5 year rally are diversifying out of treasuries into equities.

click on chart for a sharper image



A liquidity crunch is on as I talked about in Avalanche of Leveraged Loan Supply and Liquidity Crunch Looms. But much like Pavlov's dogs, stock market bulls are salivating to buy the dip. Those bulls are ignoring the fact that risk is way underpriced and fundamentals as well as market psychology have dramatically changed for the worse. Yes a bell is ringing, but it is a liquidity warning not a dinner bell. The difference is vitally important even though both bells sound the same.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/