NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: August Existing Home Sales
KEY DATA: Sales: +7.7%; 1-Family: 8.5%; Condos: 1.8%; Median Price (from 8 ’10)): -5.1%
IN A NUTSHELL: “The housing market is not robust but the rise in existing home sales shows we shouldn’t simply dismiss it.”
WHAT IT MEANS: Wonder of wonders, miracles of miracles, housing sales actually rose solidly in August. Granted the level is still nothing to make realtors smile, but improvement is not something to make light of. The sales rate was the highest since March, a period when confidence was rising and the job market was improving. The biggest gain was in the single-family segment as condo sales rose more slowly. Investors are a large part of the improvement as the large overhang of distressed homes is creating a lot of opportunity, especially for those with case. The sales of these properties accounted for 31% of the total, according to the National Association of Realtors. One of the big impediments to getting sales to really pick up is the mortgage/appraisal process. The Realtors said that 18% of the contracts failed because of low appraisals. That is likely the reason for the rising share of all purchases being distressed homes. It’s hard to get a decent appraisal for a “normal” property if the competition is a foreclosed home. Indeed, the sharp decline in prices over the year may be due to the shifting of the market into distressed homes. Geographically, all regions were up but there was a huge rise in the West. That came after a large decline in July so when you average the two months, the West is really not having a sudden return to happy days again.
MARKETS AND FED POLICY IMPLICATIONS: This was a good report as sales rose. But it also showed the problems the housing sector is facing. As long as non-distress homes have to compete with so many distressed homes, the mortgage process will restrain sales. You just cannot get a mortgage even if the comparables are just not comparable. That is a glitch in the system that it seems no one wants to touch but it is real and an issue. The rising share of distressed homes also points out the problems of prices, which everyone likes to look at. As the distribution gets skewed toward these lower priced homes, the price measure will be depressed. This report will likely be a tree falling in the forest as the FOMC is meeting and that is the focus of everyone’s attention, at least today. Despite the growing criticism of the Fed, the Committee is going to do what it thinks it should do, not what politicians think should be done. And that is the role of the Fed: To be an independent rudder to an economy that is too often driven adrift by the politics of fiscal policy. If leaning against the wind sometimes gets difficult, so be it. I have been critical of the Fed in the past and I certainly will be critical of it in the future but the members are non-political and above reproach. It is crucial that we support an independent Fed. Think of the messes we would get into if the politicians ran both fiscal and monetary policy.
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