INDICATOR:  November Existing Home Sales

KEY DATA:  Sales: -6.1%; Year-over-Year: +2.1%; Median Prices (Year-over-Year): +5.0%

IN A NUTSHELL:  "The housing market may still be improving, but it is doing so with two steps forward and one back."

WHAT IT MEANS:  Is the housing market improving or softening?  If you look at the data, the answer is yes.  After two consecutive nice increases in existing home sales, the market went backward in November.  The sales pace fell to its lowest rate since May.  That is not to say the increase has been steady.  It was hardly that.  Sales rose in June and July, fell in August and then rose once again in September and October.  Hence, the two-steps forward, one-step backward comment.  In November, the declines were in every region.  The largest drops were in the Midwest and West and if anyone knows why sales were off in those areas by about 9%, which is really large, please tell me.  It was not as if the weather was terrible.  In other words, I just don't get it.  As for prices, they have held in there quite nicely.  After bottoming in June, the year-over-year change in the median price has slowly increased.  That may be due to the sluggish increases in inventories.

MARKETS AND FED POLICY IMPLICATIONS: It is hard to explain the sharp drop in home demand.  The weather in November was nothing exceptional and mortgage rates were not that far above the fifty year lows.  One explanation is that the supply of homes for sale is relatively limited - and it is - and so buyers are having a difficult time finding suitable options.  That makes sense and a limited supply may restrain home sales for a long time to come, especially when rates rise.  In the future, homeowners will have to decide that a different home at a higher mortgage rate is worth it.  Some may not feel that is the case, especially since the recent extraordinarily low rates will look awfully good compared to more normal mortgage levels.  That said, movers are not facing higher mortgage rates now, so the explanation for near-term supply weakness may be the lack of equity.  If people don't have enough equity to pull out of their current homes, they may not have the ability to make a move.  That would limit the number of homes for sale and thus sales themselves.  The implication is that the pathway back to a more normal housing market, where what I call the churn or housing turnover helps drive sales, is a long and winding one.  What will investors make of this report?  Well, since any indicator that points to the Fed being "patient", i.e., that only reinforce the view that the Fed will not tighten anytime soon, can only add to the strength in equity prices we have seen since the FOMC meeting.  Low rates are the markets drug of choice and as long as people believe the Fed will keep mainlining that drug, they will remain euphoric.

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