Last August, Hurricane Katrina struck the Gulf Coast, caused over $100 billion of turmoil, and highlighted the ineptitude of government services to provide effective coordinated relief. This August was much milder; meteorologically and economically. According to the Fed, economic growth has moderated in step with a cooling housing market and lagged increases in commodity prices and interest rates. Although inflation was a market concern as recently as last month, recent indicators reflect that the cumulative effects of monetary policy actions and economic restraint have reined aggregate domestic demand. Therefore, the Fed will not raise rates at its next meeting.

New US home sales continued to fall and housing inventories rose, leaving builders with record inventory. In the Midwest, home sales slumped to nine year lows. Ironically, year-over-year US home prices rose albeit only slightly, 0.3%. Expect average US housing prices to decrease at the next report. Reduced consumer and housing spending will make the economy more dependent on business spending for strength.

In Orange County California, housing numbers also indicate trepidation; over a quarter of the nearly 16,000 homes on the market are vacant. In August, over three thousand sellers opted to pull their homes off the market compared to 1,260 in August 2005. The stability of home prices may depend on how many people delisting their homes are motivated sellers versus how many are opportunistic sellers hoping for a high price but not necessarily needing to sell. Either way, expect a further drop in demand and in active inventory as more sellers delist.

Michael Ashley Schulman, CFA
Hollencrest Capital Management