More Fed Rate Hikes Would Worsen Home Sale Cooldown
Reports last week from the U.S. Commerce Department and the National Association of Realtors® showed that a significant slowdown in sales of new and existing homes is underway and could help convince the Federal Reserve Board to hold the line on interest rates when its Federal Open Market Committee meets on Aug. 8.
Sales of new single-family homes were down 3% in June to a seasonally adjusted annual rate of 1.131 million units, following a downward revision to the sales rate for May, according to figures released last Thursday by the Commerce Department.
Actual new home sales for the first half of the year were down 11.9% from the same period of a record-setting 2005.
“The government numbers are finally reflecting what builders have been reporting from the field for several months,” said NAHB President David Pressly. “Builders see this as an orderly slowdown and have been slowing their production as market conditions and demand cool down."
“The slowdown for June, coupled with the downward revisions of the previous two months, indicates that we are well into the predicted cooling down process,” said NAHB economist Michael Carliner. “We expect this to continue as the impact of recent increases in interest rates is fully reflected in sales.”
Further Monetary Tightening Would Be a Negative
“NAHB’s current forecast shows about a 12% decline in new-home sales for 2006 as a whole,” Carliner added. “However,” he warned, “any further monetary tightening by the Federal Reserve would have a more severe negative impact on sales.”
Mortgage interest rates dropped slightly in Freddie Mac's Primary Mortgage Survey for the week ending July 27 “on indications that economic growth is moderating, inflation remains under control and the Fed just may pause raising rates for awhile,” said Frank Nothaft, Freddie Mac's chief economist.
Released on July 26, the Fed’s Beige Book report on economic conditions in the 12 Federal Reserve Districts noted “numerous individual reports pointing to evidence that the pace of growth has slowed.” That observation was confirmed by the end of the week when the government showed GDP growth declining to a rate of 2.5% in the second quarter, down sharply from 5.6% for the first three months of the year.
Based on information collected on or before July 17, the Beige Book was prepared at the Federal Reserve Bank of San Francisco. The report summarizes comments received from businesses and other contacts outside the Fed.
Consumer inflation in the second quarter was running at a 4.1% pace. In the Fed’s report, it was noted that although manufacturers and retailers are finding it easier to pass on cost increases in the prices they charge, more generally “vigorous competition held price increases down, and some contacts noted reliance on productivity increases to maintain profit margins in the face of rising input costs.”
A Declining Home Sales Pace
As for the housing markets, the Fed report said: “For new and existing homes, available reports indicated that the pace of sales declined and that the inventory of available homes and time on the market rose in most major metropolitan areas nationwide. Slower sales activity has translated into more limited price gains, and residential construction activity has fallen in most Districts as well.”
The notable exceptions for slowing housing activity were the St. Louis District, where “the pace of home sales was largely unchanged or up slightly compared with a year earlier, although residential construction slowed there;” and the Dallas District, where “despite signs of cooling, ‘home demand remains strong’ and residential building activity has been ‘robust.’”
The Beige Book summary also observed that there have been scattered reports indicating “a strengthening in demand for rental units” as “home demand has slipped more generally.” As NAHB has brought to the Fed’s attention, rising rents in response to rising mortgage rates are perversely working their way into the measures of core inflation that the central bank is watching closely to determine its monetary policies (click here for a related story on Chairman Ben Bernanke’s testimony to Congress).
The Fed report also says that “Builders in some areas faced moderate constraints on construction activity. High construction costs reportedly were a restraining factor that delayed or caused the cancellation of some building projects in the Cleveland, Chicago and San Francisco Districts. Moreover, Atlanta reported that some commercial building projects along the Gulf Coast have been put on hold until late fall, after the current hurricane season is over.”
Demand for commercial space has helped offset declining residential construction, with commercial construction activity reported to be at high levels and increasing in the Dallas, Atlanta and Richmond, Va. districts; slowing in Chicago; and mostly flat in Kansas City.
Inventories on the Rise
On the sales of new homes in June, the Commerce Department reported declines in three of the country’s four regions: 11.3% in the Northeast, 7.9% in the Midwest and 6.0% in the South. The annual sales rate was up 8.2% in the West.
The inventory of new homes for sale rose to 566,000 units at the end of June, a 6.1-month supply at the current sales pace. Almost all of the increase was in for-sale units that were permitted but not yet started; they represented nearly 20% of the inventory level.
Units still under construction comprised almost 57% of the inventory, and completed homes for sale were 23% of the total — about the same as a year earlier.
Completed homes sold in June were on the market for a median of 3.8 months, compared with 4.0 months a year earlier.
Total existing-home sales — including single-family, town homes, condominiums and co-ops — declined a modest 1.3% in June to a seasonally adjusted annual rate of 6.62 million units, from an upwardly revised level of 6.71 million in May, according to the Realtors®. Sales for the month were 8.9% below the 7.27 million-unit pace in June 2005.
“Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projections, which tells us that the market is stabilizing,” said David Lereah, chief economist for the Realtors®. “At the same time, sellers have recognized that they need to be more competitive in their pricing given the rise in housing inventories. Home prices are only a little higher than a year ago.”
Total housing inventory levels rose 3.8% at the end of June to 3.73 million existing homes for sale, which represents a 6.8-month supply at the current sales pace. The inventory was a tight 4.4-month supply one year earlier.
Financial analysts appeared to be split fairly evenly over whether the Fed will decide to move up the federal funds rate by another quarter of a percentage point, to 5.5%, next Tuesday.
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