Last week we received further evidence that the August credit crisis is resolving itself in orderly fashion. The First Data buyout went through and investors eagerly snapped up the debt to finance it.  The buyers of Harman and Sallie Mae reneged on their purchases. The prices were just too high in today’s rational debt world. Credit market problems and subprime mortgages are old news. As I’ve written about before, adjustable rate mortgages that re-set based on LIBOR will be a problem (see The Economic Crises of 2008 and On the Rebound), so the housing/mortgage market isn’t out of the woods yet.

 

New homes sales dropped to their lowest level in seven years (still, not bad compared to the long term average for annual new homes sales) and the sales prices dropped by 8%. This is a cyclical slowdown in the new homes market and is separate from any mortgage problems, but if it is coupled with a decline in value of existing homes it likely will plunge us into a recession. Further Fed cuts won’t prop up home values, what will mitigate it is a growing economy and that brings us to our final point. 

 

This Friday, the September jobs report will come out. (Remember, August’s was a disappointing 4,000 new jobs created.) The preliminary indication is 100,000 new jobs created in September, a number sufficient to suggest that the economy will keep growing, albeit slowly.

 

The market is craving economic news so it can determine if we’re heading for a recession or continued economic expansion. Housing values and mortgage rate adjustments will play out slowly over the remainder of the year. This week, the market will focus on Friday’s jobs report and will market time until then.