Dow Heads Lower as Lag in Housing Cuts Into Hopes of Swift Economic Recovery

Dow Heads Lower as Lag in Housing Cuts Into Hopes of Swift Economic Recovery

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average may have bounced back to a small gain to close the day yesterday, but so far in trading this morning, it's all headed downhill. With a loss of 62 points as of 11:45 a.m. EDT, the index isn't being helped by this morning's news of economic progress across the pond. Downward also seems to be the trajectory of the housing market, if recent data is to be believed. With housing playing such a big role in the overall economic recovery, should investors be concerned about the recent summer slump?

Another drop
This morning's Mortgage Bankers Association report on new mortgage applications activity showed another big drop, with purchase money loan applications falling another 5%. Despite new drops in mortgage interest rates, which fell another 5 basis points last week, buyers are simply not seeking out new mortgages to finance home purchases. This data follows a line of similar numbers showing that the consistent growth in the housing market is indeed slumping toward the end of the summer.

Last week the market saw that construction spending in June was down 0.6%, a significant decline considering that tight inventory supply has caused new home sales to fall during the same time period. And though prices for homes continues to rise, the low inventory levels of newly constructed homes may allow buyers to negotiate more, which led to a 5% drop in the median sales price during the month of June.

Though the trends are pointed in the wrong direction, there may be hope in new numbers to come this week. Tomorrow's Housing Market Index and Friday's housing starts data should give investors a clearer picture of how the housing market is progressing. Based on responses from members of the National Association of Home Builders, the housing index weighs the following components to determine the market's outlook: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes. And with June being somewhat unseasonably wet on the East Coast, July's housing starts (the count of new construction) will give a better sense of how homebuilders are reading the market.

Depending on housing
Though today's 1.51% decline can't be completely linked to the decline in housing data lately, the Home Depot certainly isn't being helped if homeowners and new buyers are wary of current market conditions. And as a supplier to construction firms, the retail chain may find the data from Friday's housing starts of keen importance.

The weekly mortgage applications data has certainly been of keen importance to bank investors for the past few quarters, especially as Wells Fargo and JPMorgan , the nation's top two originators, predicted a slowing of new activity during the coming months in their second-quarter earnings reports. Though Wells Fargo did see a rise in new mortgage activity during the second quarter, it had noted that the pipeline for new home loans was much smaller than the bank had seen exiting the first quarter. JPMorgan didn't experience the same activity, but did note that it expected a period of weaker origination before activity picked up toward the end of the year.

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