Housing Under Intense Scrutiny, Volatile Data Likely to Send Mixed Signal

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By Rex Nutting

RISMEDIA, March 20, 2007-(MarketWatch)-Nervous markets will be watching the monthly housing numbers with even more intensity after the troubles in the subprime mortgage market of the past month.

The monthly housing data will dribble out over the next two weeks, beginning with the home builders' index this Monday and concluding with new-home sales next week.

"The housing market will be sharply in focus in the week ahead," wrote Tony Crescenzi, chief bond market strategist for Miller Tabak & Co.

The market will be looking for certainty in the numbers, but these data just aren't up to the job. They are very volatile, especially in the winter months, when cold and wet weather, or warm and dry weather, can make a huge difference once the raw figures are seasonally adjusted.

Economists expect the data in the coming week to be mixed, reflecting both the wild weather and the usual volatility. (The starts number has so much statistical noise that the standard error is plus or minus 7%.)

Most people who watch housing closely won't be persuaded one way or the other until the March and April numbers come out, anyway. This is just the pre-season.

Housing starts
The biggest number of the week will come on Tuesday, when the Commerce Department reports on housing starts and building permits for February.

Most economists expect a rebound in starts after they plunged 14.3% to 10-year low of 1.41 million seasonally adjusted units in January. The weather was horrible in January compared with the balmy conditions in November and December. Starts in the West fell a record 34%.

Usually, when starts fall that much, they bounce back the following month because the weather turns around.

The median forecast of economists surveyed by MarketWatch calls for 1.46 million in February. For building permits, which are not as sensitive to weather, the median forecast sees a small increase to 1.60 million from 1.57 million.

Perhaps oddly, the weaker the starts are, the more bullish the outlook. That's because a huge inventory of unsold homes must be worked down before the housing market recovers. The sooner builders throw in the towel, the sooner the sector rebounds.
A few economists are looking for further declines in starts in February.

"Although large declines such as the one seen in January are typically followed by at least a partial rebound in activity, the weather was even more unfavorable in February than in January," argued Stephen Stanley, chief economist for RBS Greenwich Capital, in his weekly research note. Stanley expects starts to fall to 1.39 million annualized.

Housing starts are down a whopping 38% from the peak in January 2006.

The other data
There are two other housing releases coming this week: the homebuilders' index on Monday and existing-home sales on Friday.

The homebuilders' index measures the sentiment of contractors. It plunged to a 15-year low 30 in September and bounced up five points to 40 in February. That's an impressive improvement, but it shows that only 40% of builders are confident about the market.
For March, economists see a pullback to about 38. But there's no way to accurately predict this number.

On Friday, the National Association of Realtors will report on February's existing-home sales. Economists expect a decline to about 6.33 million seasonally adjusted units from 6.46 million in January, which was a seven-month high. Sales were down about 10% from the peak.

The pending home sales index fell 4.1% in January, signaling a drop in February's sales. The pending sales index is measured when a contract is signed, the sales are recorded at the closing of the sale, usually a month or two later.

Inventories of unsold homes probably rose to 3.69 million, or a 7-month supply from 6.4 months in January, said Brian Jones, an economist for Citigroup Global Markets.

Inventories of existing homes can be misleading at this time of the year, however, because many sellers pull their homes off the market during the slower winter sales months, only to relist them in the spring.

Rex Nutting is Washington bureau chief of MarketWatch.

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