Housing And The Economy

¹²Housing And The Economy

By Normxxx | 24 September 2010

Yesterday morning, it was reported that existing home sales rose 7.6% in August from July's level. Wow. The instant reaction was that housing has bottomed.

But even a 7.6% improvement from July's horribly depressed level makes August the 2nd worst month on record, and has existing home sales so far in the 3rd quarter running at a 29% slower pace than the 2nd quarter. Compare August sales to a year ago. In August of last year, existing homes sold at an annualized rate of 5.1 million homes. Yesterday's report was that this August they sold at an annualized rate of 4.1 million homes, down 19.6% year over year. Compare the 3rd quarter so far to the 2nd quarter.

In April, existing home sales were at a 5.77 million annualized rate, in May 5.66 million, and in June at 4.6 million. That's a monthly average of 5.34 million for the 2nd quarter. (But note also the direction of those numbers— all down— and during some of the normally strongest months for housing!)

So far in the 3rd quarter, the bottom has dropped out of housing again. Existing home sales plunged in July in the largest monthly decline ever, to an annualized pace of only 3.37 million homes. And yesterday it was reported that August sales were "up" 7.6% from that July record low, but to only 4.13 million homes (the second lowest monthly pace on record).

So the monthly average in the 3rd quarter so far is an annualized rate of 3.75 million existing homes sold, down from the monthly average in the 2nd quarter of 5.34 million. That's a 29.7% quarter to quarter decline. This is not a positive report by any means, but another sign that the economy in the 3rd quarter is worse than the dismal 2nd quarter, when GDP grew at only a 1.6% pace.

Meanwhile, new home sales remain near record lows, coming in unchanged in August. Sales of new homes were flat in August at a seasonally adjusted annual rate of 288,000, the second lowest level since the Commerce Department started tracking new home sales in 1963. Last month, the Commerce Department had reported that sales plunged to a record low of 276,000, but this month it revised that number to 288,000. Sales year-over-year are down 28.9%.

"It would have been nice to have finally seen a nice upward blip, but this is not surprising at all," said Leif Thomsen, CEO of Mortgage Master. "Builders are unable to get financing for new homes in this economy, and buyers aren't in a hurry to buy because they know nothing is really selling. "If people don't have jobs they obviously aren't going to go out and buy homes. If unemployment doesn't get worse, we can expect a very slow, but upward move from here."

The government report showed that the median price of new homes sold in July was $204,700, a 0.5% decline from July and down more than 1% from August 2009. At the end of August, 206,000 new homes were for sale. At the current sales pace, the government expects the supply to last 8.6 months.

"This is a very, very small step in the right direction but shows that prices are starting to stabilize," said Thomsen, warning that it is likely to take years for prices to fully stabilize. "If you have a stable market, you're looking at inventory of six to seven months. Since builders are afraid of building in this environment and can't get the financing to build, the [current] supply might not change much in the near future."

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Fed: Recovery Continues To Slow

By Chris Isidore, Senior Writer | 21 September 2010

NEW YORK (CNNMoney.com)— The U.S. economic recovery continues to lose steam, the Federal Reserve said Tuesday, but the central bank unveiled only tougher language but no new policies to try to spur growth. While the Fed said it expects improvement ahead, it cautioned "the pace of economic recovery is likely to be modest in the near-term". The Fed left its federal funds rate at close to 0%. That overnight lending rate, which is used as a benchmark to set the rates paid on a wide variety of business and consumer loans, has been at that level since December 2008.

The Fed's statement again promised that this rate would stay at an "exceptionally low levels" for an "extended period." The Fed also announced it will continue to make new purchases of Treasurys with the proceeds of its earlier investments. That policy was announced at its previous meeting last month.

While the Fed did not announce any additional steps Tuesday, it was more aggressive in what it promised to do in the future if conditions weaken further. In its statement, the Fed indicated it is prepared to "provide additional accommodation" in order to "return inflation" to slightly higher levels. Since central banks typically are more concerned with fighting, rather than feeding, inflation, the language was very unusual. It may be a sign that policymakers are more worried about the risks posed by lower prices rather than higher prices.

"That's pretty aggressive talk," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. "They didn't draw the sword, but they sure rattled it quite a bit". The Consumer Price Index, the government's key measure of inflation, is up only 1.1% over the last 12 months, while the 'core' CPI, which strips out 'volatile' [[ie, inconveniently higher: normxxx]] food and energy prices, is up only 0.9%.

The Fed is widely believed to want to see core CPI up at least 1% to 2% in order to keep prices steady. One fear is that if prices fall, it can cause businesses to cut back production. That can lead to further job losses. McCain said the Fed's statement lays the groundwork for the central bank to make additional purchases of assets such at Treasurys at subsequent meetings.

"This takes a major step in that direction," he said. "It's as much as they can do without announcing an actual date and details of such action". But other experts said it may not matter what the Fed does at this point.

Sung Won Sohn, economics professor at Cal State University Channel Islands said that while the Fed has been making promises that it stands ready to act, "unfortunately, what the Fed can do to boost the economy is very limited." Once again, Kansas City Fed President Thomas Hoenig objected to the statement and Fed policy. He argued the economy continues to recover at a moderate pace and that keeping rates so low for an extended period could lead to a new bubble in markets that will cause greater problems down the line.

Still, the Fed said there are numerous signs of weakness in the economy, including employers reluctant to add staff, a depressed housing market, a slowdown in the growth of business investment and only modest improvement in consumer spending.