Wisest of the crowds

The Commerce Department released more data and analysis confirming what we know - that housing is dragging the economy. The economy grew just 1.3% (preliminarily) for the first quarter of 2007. From the press release:

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending that were partly offset by negative contributions from residential fixed investment, private inventory investment, and federal government spending.

Here is a chart of GDP going back a few years:

As you can see, things haven’t been this bad since Q1 2003. The markets largely shrugged this off but home builders took it on the chin:

Most of the big names down around 3% but the index as a whole finished down just 1.52%

Will CFC (Country Wide Financial) be a reasonable indicator that the sub-prime market is truly spilling over to the whole housing market? If you believe that the markets are the best aggregators of information and are forward looking, then keep your eye on the stock. It looks like a break of $30 dollars a share could indicate that investors believe that the housing landscape is still working its way through the mess and that the much discussed resetting of ARM’s may get uglier. This, in the context of a broad consensus that the Federal Reserve will lower fed funds - hence making ARM’s cheaper - is a staggering thought. Take a look at the chart below to get a sense of how well CFC has done over the last 8 years.

Yesterday I did a roundup of the doom & gloom from around the world yet the Philadelphia Housing Index has marched back from its lows in late summer. Take a look at this chart from Yahoo:

I think this says it all. The index has retraced nearly ALL its declines. So what is the market signaling? Is there a relationship between the fortunes of housing builders and housing values?

In time we hope to highlight these relationships between the financial markets and housing but we would love to hear your thoughts.