Why the Dow Jones Is Jumping Today

Home sales declined but were above the market's low expectations.

Apr 22, 2014 at 1:32PM
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Following multiple reports on the housing market that were better than the market's low expectations, the Dow Jones Industrial Average (DJINDICES: ^DJI) is up 105 points to 16,554 as of 1:30 p.m. EDT. The S&P 500 (SNPINDEX:^GSPC) is up 12 points to 1,884.

Earlier this month, economists at Freddie Mac released their U.S. Economic and Housing Market Outlook, in which they cut their forecasts for this year's existing-home sales to 5.5 million as a result of greater-than-normal weakness in the first two months of the year. Freddie Mac chief economist Frank Nothaft said: "We're getting mixed signals as we start the spring home buying season. Tight inventory may pose a significant challenge for home buyers in many markets across the country, which may result in higher home prices and sales being lower than expected."

In a separate report, Fannie Mae's economists also lowered their expectations for new-homes sales by 50,000 to 1.1 million new houses. These lowered expectations were putting downward pressure on housing-related stocks.

Today, the market is looking more buoyant after two U.S. economic releases on the housing market beat expectations.

Report

Period

Result

Previous

FHFA House Price Index

February

0.6%

0.4%

NAR existing-home sales

March

4.59 million

4.6 million

The FHFA's home price index is less useful than in years past, as it only includes data from Fannie Mae and Freddie Mac mortgage originations. This means it excludes jumbo loans, cash purchases, subprime purchases, and other noncomforming conventional loans. For reliable data on home prices, we have to wait until next week for the Case-Shiller home price index.

Existing-home sales were essentially unchanged on a seasonally adjusted annual basis at 4.59 million, but they nonetheless exceeded analyst expectations of 4.55 million. Existing-home sales had steadily risen as interest rates fell, but they dropped last year as interest rates rose after the Federal Reserve hinted that it would begin to wind down its asset purchases.

US Existing Home Sales Chart

US Existing Home Sales data by YCharts.

Given the better-than-expected housing data, homebuilder stocks are up, with the SPDR S&P Homebuilders ETF (NYSEMKT:XHB) up 1.2%. It should come as no surprise that today's Dow leader is Home Depot (NYSE:HD), up 26% to $80. Home Depot also received an upgrade to "outperform" from BMO Capital Markets, which raised its price target from $82 to $90. BMO analysts believe sales are trending above Home Depot's current forecast. Home Depot is one of the many companies that will do well if the housing market continues to improve. Further, Home Depot's management continues to return capital to shareholders through its dividend (which it recently raised, bringing the yield to 2.4%) and a $5 billion share repurchase plan.

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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak.He has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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