Diane Swonk, Chief Economist
August 24, 2010 – 9:30 a.m. CT
Home Sales Plummet, Raises Likelihood of Additional Monetary Stimulus
Existing home sales sunk 27.2% to 3.83 million units in July, after being revised down to 5.26 million units in June, and its third drop in as many months. This is a record low for the existing-home sales series, which was launched in 1999. Single family home sales, which account for the lion's share of the sales, slid to their lowest level since May, 1995, which was a year that almost resulted in a recession.
Many blame the end to homebuyer tax credits, which expired in April. It is hard to justify the magnitude of the decline on tax credits alone. Mortgage rates dipped to record lows during the month and affordability soared.
The recent loss in jobs and concerns about the sustainability of the recovery are more likely the culprits. We have also seen a fairly significant tightening of lending standards since the Fed ended its mortgage-backed security (MBS) purchases program last spring. Banks are less willing to lend against the backdrop of uncertainty we face when they can't offload at least a portion of that risk as securitized debt sales.
Concerns about whether housing prices will fall further is also a problem for lenders and borrowers alike, especially in light of the growing backlog of foreclosures that we are now seeing. The rise in "strategic foreclosures" - those who can afford but choose not to service their mortgage - is particularly disturbing, as it is adding insult to injury to home values in neighborhoods which have already seen 30-40% declines in the value of their homes.
What could reignite demand? Jobs are key. Few will lend or want to commit to a mortgage in a market where income is uncertain. It would also help if Fannie and Freddie were buying more MBS, which would allow banks to process more mortgages without worrying so much about the risk.
That, however, would require the Fed to resume its purchases of MBS, which many within the Fed system would loathe to do. The Wall Street Journal reported today that at least seven within the Fed system opposed the Federal Open Market Committee's (FOMC) decision to offset any decline in the Fed's balance sheet due to maturing mortgages with additional treasury bond purchases, let alone something more controversial like MBS purchases.
This issue will be a hot topic at the Kansas City Fed's Jackson Hole, Wyoming meeting, which I am attending later this week. Fed chairman, Ben Bernanke, is slated to speak on Friday morning, and widely expected to underscore the tools that the Fed still has to further stimulate the economy, despite objections in his own ranks. Tom Hoenig of the Kansas City Fed will be particularly interesting to watch, as he is not only the host of the meeting, but has also been one of the most vocal in his dissents to the Fed's current stance on interest rates and quantitative easing.
The Bottom Line: The economy is weak, and flirting with a double dip. Without a more demonstrative pickup in growth in the next few weeks, the Fed could be back in the game of buying assets soon, regardless of dissent in its ranks. The next FOMC meeting is scheduled for September 21, 2010, and it is likely to be a market moving event.
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