HOUSING STARTS
Lean wallets pinch gains
As home prices ratchet higher, creating fears of a bubble, American workers are in a squeeze. Not only are they pouring record numbers of dollars into fuel tanks, but incomes are growing slowly, if at all. Result: Wallets are looking leaner for consumers trying to make ever-larger mortgage payments.
Doubters about the real estate market say that double-digit price increases cannot go on indefinitely, that too many homes already are out of reach.
That brings us to Tuesday’s report of March housing starts. In February they rose unexpectedly by 0.5 percent, to 2.195 million units annually, a 21-year high. Analysts expect a slight pullback.
Chicago economist Diane Swonk is in the camp that says a price bubble is unlikely. Nationally, homes will rise in value by 6.5 percent this year and another 4 percent in 2006, she said.
Although sales will slacken a bit this year, they will remain near record levels, said Swonk, of Mesirow Financial.
“Construction will hold up even better, aided by projects already in the pipeline and tight inventories of new and existing homes,” she said. “This is shaping up to be another phenomenal year for housing.”
INFLATION INDEXES
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Energy costs boost prices
Is it possible that the Federal Reserve, on a nine-month campaign to tighten credit, could soften its stance?
Some analysts thought so after last week’s release of central bank minutes that were deemed less than hawkish. Fears of inflation appear to be receding.
Economist Lynn Reaser is looking for a shocking gain of 0.6 percent in Tuesday’s report of the March producer price index and a rise of 0.5 percent in Wednesday’s consumer price index.
But Reaser, of Bank of America’s Investment Strategies Group in Boston, says inflation worries will soon subside, because most of the concerns stem from energy. Excluding energy, the gain in each monthly inflation index would be only 0.2 percent.
“Corporations have limited pricing power and we already have seen a severe drop in the cost of oil,” she said. “That means price pressures inevitably will simmer down.”
EQUITIES
Searching for leadership
A mystery in the stock market is why the drop in petroleum prices hasn’t set off much of a rally. Oil has fallen more than 13 percent from its peak, yet Wall Street is in a state of torpor.
Chicago investment manager Marshall Front says the stock market is in search of new leadership, as energy and materials companies suffer through an overdue price correction.
“There is a growing perception that growth is slowing, at least slightly, and that is making some investors nervous,” said Front, of Front Barnett Associates.
As steel companies and others involved in producing the basics of the economy head lower, he sees opportunities for investors in pharmaceuticals and other health-care stocks.
In addition, Front said, “if there is a realization that the Fed is at the end of its rate-raising cycle, it would create an upward shift for the financials.”
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