November Pending Home Sales/Weekly Unemployment Claims

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: November Pending Home Sales/Weekly Unemployment Claims
KEY DATA: Pending Sales: +7.3%/Weekly Claims: 381,000 (up 15,000)
IN A NUTSHELL: “Most housing reports are looking up but prices are still in the dumps.”

WHAT IT MEANS: It is hard to get really strong growth if home construction remains weak, so any good news about that sector should be trumpeted. So here is today’s blast: Housing sales are beginning to climb. The National Association of Realtors reported that pending home sales, which are contract signings, jumped in November to the highest level since April 2010. Since that was when the government’s “first time, long time” buyers’ incentives were in place, it looks like we are now in the midst of a real, not policy-hyped recovery. Improvement was seen in all regions with the West and Northeast leading the way.
In a separate report, unemployment claims jumped last week. That was expected though the rise was somewhat more that predicted. Still, the trend is down as the four week moving average fell fairly sharply. It is now at a level that tends to signal declining unemployment rates.

MARKETS AND FED POLICY IMPLICATIONS: Most housing data have been coming in better than expected and that is an indication that the log jam is beginning to break. The jump in pending home sales should lead to a further rise in sales over the next few months. With affordability at a record high, if we can only make it a little easier to get a mortgage we just might see the sector show some real strength. Unfortunately, the huge number of distressed houses overhanging the market will continue to put downward pressure on prices and limit the uptick in home construction. Still, this report adds to the belief that the weakest link in the economy, housing, is starting to come out of it.

Next week is a big one as we get the December jobs report on Friday. While the rise in the claims number is a warning that the labor market is still not strong, there are real hopes the payroll numbers will be quite solid. The bigger question is the unemployment rate, which gapped down in November. A modest rise, which is expected, would be a positive sign that conditions are firming and that seems to be the message coming from the claims numbers. So we are ending the year on an up note and I want to wish everyone a

HAPPY NEW YEAR
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

November New Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: November New Home Sales
KEY DATA: Sales: 315,000 (up 1.6%); Nov ’10-Nov ‘11: +9.8%

IN A NUTSHELL: “The choices may be limited but the sale of new homes is moving up anyway.”

WHAT IT MEANS: After falling apart in the summer of our discontented Congress, new home sales have been on a steady upward climb. The November pace was just about at its highest level this year. The October number was revised upward and if that happens with November, we could see the rate break that high. Still, the level is ridiculously low and is about one-quarter the pace hit at the peak of the boom. The current sales pace needs to more than double before we can say that demand is decent. With so many distressed homes on the market, developers are “building down”, constructing smaller homes so the price continues to fall. At the same time, though, the supply is being kept under control. Indeed, the number of homes for sale hit the lowest level in the forty nine year history of the data.

MARKETS AND FED POLICY IMPLICATIONS: The recovery in the housing market is under way but it is also glacial. There is not much hope for the new construction segment of the market as long as the overhang of distressed homes remains so high. Still, up is better than down and the remaining builders are probably seeing better sales, at least compared to last year. In any event, it’s time to do some food shopping for the weekend so let me say to all:
Happy Holidays
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

November Existing Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: November Existing Home Sales
KEY DATA: Sales: +4.0%; Year-over-Year: 12.2%; Prices (Nov ’10-Nov ‘11): -3.5%;

IN A NUTSHELL: “It turns out the housing collapse was greater than thought but at least the process of digging out from the deep hole is beginning.”

WHAT IT MEANS: The housing market is healing, albeit slowly. Starts are improving and now we see that existing home sales are on the rise. Demand rose solidly in November led by a jump in single-family activity. Condo purchases were flat. The gains were across the nation though there was nearly a double-digit rise in the Northeast. So far in 2011, total sales are running almost two percent above the 2010 level. The increases were pretty evenly distributed between the single-family and condo markets. That said, the level of demand is unbelievably low. The National Association of Realtors revised the data for the period 2007 through 2010 and reduced total sales by over 14% or by about three million fewer sales. In other words, the meteor that cratered the housing market was a lot larger than initially estimated. And you thought the dinosaurs had problems. The reduction is in synch with the larger decline in GDP during the recession that was reported by the Bureau of Economic Affairs. As for prices, they are continuing to slide and for the first eleven months of the year, the median price has dropped nearly 5%, again with condos down a little more than single-family units.

MARKETS AND FED POLICY IMPLICATIONS: While some may concentrate on the huge downward revision to sales, the real story is the current trend in housing demand and that seems to be up a little. When you look at growth, it is the change in activity not the level of activity. Sales bottomed in July and have been moving up fairly steadily since. Unfortunately, the large number of distressed homes being purchased is reducing not only sales but supply as well. People with well-maintained homes know they cannot get their desired price, even if buyers are willing to pay it, as long as distressed homes are used as comps. It looks like these “normal” homeowners are simply keeping their houses off the market and that is reducing the number of homes for sale. That makes the supply of homes number somewhat useless as it implies that once conditions turn around, the ‘for sale’ signs will pop up like crazy. The latent supply is there, the actual supply is not. Regardless, this is another positive report that should make it clear that the economy is heading into 2012 with growing momentum. Unless Europe crashes and burns, and never underestimate the ability of politicians in any part of the world to do the wrong thing, growth in the U.S. next year could be decent. That is my forecast and I am sticking to it, at least for now.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

November Housing Starts and Permits

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: November Housing Starts and Permits
KEY DATA: Starts: +9.3%; 1-Family: +2.3%; Multi-Family: +25.3; Permits: +5.7%; 1-Family: +1.6%; Multi-Family: +13.9%

IN A NUTSHELL: “The slow process of getting back to normal seems to be underway as home construction is picking up some steam.”

WHAT IT MEANS: A major constraint to better economic strength has been the weak housing market. With so many distress homes on the market it is difficult for builders to compete. That reality still exists and is likely to continue that way for quite some time which means the pathway from disaster to health will be slow. But finally, it appears that the process of healing is underway. Housing starts jumped in November led by a huge increase in multi-family activity. With so many people out of the market and mortgages hard to get, a growing number of households are looking to rent so this segment of the market should remain strong. But there is also a steady upward trend in single-family construction as well. Looking across the nation, there was a huge increase in the Northeast that looks to be a bit overestimated. That could mean some reduction in December. Starts in the West were robust as well, they were up moderately in the South but down sharply in the Midwest. Looking outward, permit requests continue to rise and that means better construction in the months ahead. Builders are not requesting permits unless they intend to use them and the number of units authorized but not started keeps going down. We have begun to see that as the number of units under construction has increased.

MARKETS AND FED POLICY IMPLICATIONS: This was a surprisingly strong report continuing the trend of better than expected numbers. Home construction needs to improve if job growth is to pick up and that seems to be the case. While it may take two more years to return to decent levels of construction, the improvement over the next few years will add moderately to growth. But more importantly, it is estimated that an additional 100,000 starts will add roughly 250,000 new jobs and we are likely to see that increase in 2012. That bodes well for employment growth. Since these tend to be well paid positions, income growth should be bolstered as well. Thus, investors should take heart that if Europe doesn’t melt down and Congress figures out how to extend the payroll tax, the economy can continue to gain momentum. Indeed, if Europe was not such an unknown, the markets would be looking toward next year with some optimism instead the uncertainty now being felt.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

October New Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: October New Home Sales
KEY DATA: Sales: +1.3%; Median Prices (Sept-Oct): -0.5%; Prices (Oct ’10-Oct ’11)): +4.0%

IN A NUTSHELL: “The new home market remains in the doldrums.”

WHAT IT MEANS: Yes, new home sales rose in October but that is about all you can say about this report. First, the level of demand is miniscule. Think about it, only 25,000 newly constructed houses are being are being purchased each month. Second, the September sales rate was revised downward, not a trend you like to see. At least there were a couple areas around the country, the Midwest and West, where builders did see a strong pick-up in sales. But the Northeast was flat and there was a sharp decline in the South. Total sales for the first ten months of the year are down nearly 7% compared to 2010 levels. As for prices, they eased a touch over the month but were up quite nicely when compared a year ago. Builders are competing with distressed houses so they have to keep prices quite low. Builders continue to do a good job of controlling inventories so demand and supply are being kept relatively in balance.

MARKETS AND FED POLICY IMPLICATIONS: Housing has been adding a little to growth this year and that is likely to continue. But the operative word in that sentence is “little”. The huge bump in jobs, income and GDP that we usually get from a rebounding housing market is not likely to be seen for quite a long time so don’t expect overall growth to be great over the next year. Still, there really is no place to go but up so we can also count on housing to be a positive not a negative in the overall scheme of things. As for the markets, the story is the consumer and the apparently robust increase in sales during the “Black Friday” weekend. With today being “Cyber Monday”, it will be interesting to see how demand holds up. With discounts really high, earnings may not be spectacular but when it comes to the economy, it is all about the number of goods bought, not the dollar value so if people spent more on discounted products, that means consumption should be up sharply. This week we get the employment report so after the euphoria of open-wallets eases, we will get back to the most important economic indicator, jobs. The November payroll gains should be a lot better than the initially reported 80,000 rise in October. There could be a decline in the unemployment rate and an ‘8’ handle would be nice to see again.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

October Housing Starts/Weekly Unemployment Claims

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: October Housing Starts/Weekly Unemployment Claims
KEY DATA: Starts: -0.3%; 1-Family: +3.9%; Permits: +0.9%; 1-Family: +5.1%; Unemployment Claims: 388,000

IN A NUTSHELL: “Housing is firming and some improvement may be in the cards, adding to the view that this recovery is becoming broader based.”

WHAT IT MEANS: The housing sector is a long way away from being healthy but maybe it is starting to get strong enough to move out of the ICU to the recovery room. Housing starts eased a touch in October and on the surface that does not look to be anything positive. However, there was a sharp increase in September and the modest decline indicates the sector managed to sustain that upturn. There was a nice increase in single-family activity but that was offset by a larger drop in the volatile multifamily segment. With the demand for rental housing rising, I expect the multifamily component to keep rising going forward – it just may be in fits and starts. Indeed, with permit requests jumping, improving starts numbers should be seen in the November or December data. Builders are quickly taking those permits and turning them into starts as can be seen in the further decline in the permits authorized but not started pace as well as the increase in the homes under construction rate. As for the labor market, there was a nice drop in new claims for unemployment insurance and it wasn’t just a one week wonder. These data can and do bounce around and the more stable four-week moving average fell below the critical 400,000 level, signifying the likelihood of future declines in the unemployment rate.

MARKETS AND FED POLICY IMPLICATIONS: Another day of pretty good numbers. Don’t expect housing to add lots of jobs or power the economic comeback, but it sure looks like it will be adding to growth going forward. Indeed, the Home Builders Associations confidence measure has jumped two consecutive months as developers seem to be seeing clearly improving conditions. Housing has typically been the first stage of the recovery rocket and its failure to ignite has been a key factor in the sluggish expansion. That the sector may finally be adding jobs is a positive sign. When added to the drop in the claims numbers, you can see that economic conditions are moving upward at an accelerating pace. However, and there is always a however, two major roadblocks stand in the way of solid growth: Rising oil prices and European debt issues. While a European collapse would cause the most problems, I believe that is not likely. If we get what most economists believe will be a mild to moderate European recession, the recovery will be slowed but not killed. But with oil above $100 a barrel, the prospects of $4.00 a gallon of gasoline is of major concern. Worse, the combination of a European downturn and high gasoline prices could move us back to where we were in the spring when the economy was making minimal headway. So, while I like what I see in the economic data, I recognize that we are not out of the woods by any means. That is something the Fed members are quite cognizant of and why Mr. Bernanke is so willing to stick his neck out and say he will keep rates low until mid-2013. As for investors, it remains Europe, Europe, Europe and it will stay that way for a long time.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

November 2, 2011 FOMC Decision

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

November 2, 2011 FOMC Decision

“…economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

The FOMC ended its two-day meeting with a lot of information. The Committee released its usual statement, an updated economic forecast that took us through 2014 and Mr. Bernanke met the press to answer questions. When all was said and done, we discovered that the Fed thought things got a little better in the fall, the outlook for the future was still somewhat bleak and even lower than the June forecast and the Committee, according to Mr. Bernanke, had everything on the table if conditions didn’t improve.

Let’s start with the statement. The only real change came in the description of the economy. Instead of talking about “continued weakness” there was now a reference to a somewhat stronger growth rate. Of course, the members did note that “recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated”, so you can say that the perception is still of an underperforming economy.

The FOMC did not indicate it would do anything in addition to its current “maturity extension” program commonly referred to as “operation twist”. However, during the press conference, Mr. Bernanke made it clear that additional actions would be taken if necessary. That is not likely to occur anytime soon. However, since the outlook is for the unemployment rate to remain elevated through 2014, it would not be a major surprise if there was another round of quantitative easing. I don’t expect that to happen as I believe growth will be decent enough for the Fed to not have to throw another policy against the wall and hope it sticks. Indeed, even with correct policy, long term growth is likely to be in the 2.2% to 3% range, according to the Fed’s latest forecast. That is less than many are hoping for and basically says that happy days are not going to be here for quite some time.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

September Durable Goods Orders

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: September Durable Goods Orders
KEY DATA: Orders: -0.8%; Excluding Aircraft: +2.0%; Backlogs: +0.8%

IN A NUTSHELL: “Businesses continue to invest at a robust pace and that bodes well for not just current but future growth as well.”

WHAT IT MEANS: Can we finally put to bed the notion that the economy is teetering on the brink of a double-dip recession? Durable goods order fell in September but only because the hugely volatile aircraft sector tanked. Excluding both domestic and defense aircraft orders, where increases or decreases don’t do much to near term activity, demand for big-ticket items soared. Strong gains were reported in computers, metals, machinery and electrical equipment. The closely watched measure of business capital spending, non-defense/non-aircraft capital goods orders, jumped sharply. There were some declines in communications equipment and vehicles but with vehicle sales firming, that is likely to reverse in the future. Looking outward, the rising orders are causing backlogs to build dramatically and that implies industrial production and most likely hiring will be solid in the months to come.

MARKETS AND FED POLICY IMPLICATIONS: This was a robust report that continues the long line of data that indicates the economy did pretty well during the summer. It is hard to believe that businesses would invest heavily if they are not seeing the demand needed to support those expenditures. We get GDP tomorrow and I think it could surprise by coming in over 3%. Whether that calms nerves about the economy is a different story, since job gains continue to lag. Until payrolls rise more rapidly and the unemployment rate falls, the perception will be that the economy is in the dumps. Clearly, it is not. As for investors, it still seems to be about Europe and for fairly good reason. While most economists agree that the alternative to a decisive solution of the sovereign debt issue is chaos, that doesn’t mean the politicians believe that to be the case. So every time things look bright, the markets soar but when a solution gets pushed down the road, investors panic. Until a defensible policy is agree upon, look for market volatility to continue even if it appears that the U.S. economy is healing.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

September Existing Home Sales

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

INDICATOR: September Existing Home Sales
KEY DATA: Sales: -3.0%; 1-Family: -3.6%; Condos: +1.8%

IN A NUTSHELL: “The housing market just cannot get any traction despite record low mortgage rates.”

WHAT IT MEANS: I was nice to see that housing starts improved but for the market to really be solid, the existing home segment must improve. This is where most of the action takes place and right now it is largely treading water. Existing home sales eased back in September, according to the National Association of Realtors. A rise in condo and co-op purchases couldn’t offset a decline in single-family sales. The only region where demand improved was the Northeast. Contract failures, which are usually due to an inability to secure a mortgage, remained high. As long as distressed homes affect appraisals and credit standards remain tight, sales are not going to gain much traction. Housing prices were down over the years despite a decline in the share of homes sold that were distressed.

MARKETS AND FED POLICY IMPLICATIONS: There are so many hurdles facing the housing market that it is hard to see when conditions will return to “normal”. In addition to appraisal and credit issues, lots of households don’t even have the equity to make a move. With job growth weak, mobility is limited and that too slows the market. Still, the mortgage rate is so low and affordability so high that you would think conditions should be improving a little. It just doesn’t look that way as the September sales pace is pretty much what we have seen all year. Sometimes it has been higher, other times lower but it seems that roughly a 5.0 million unit annualized sales pace is where demand seems to wander around. In September, the pace was 4.91 million. So once again it needs to be pointed out that the economy will have to make do without housing pushing things upward. That means the slow, steady, grinding recovery is likely to stay that way for quite a while.
RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com

September 21, 2011 FOMC Decision

NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist

September 21, 2011 FOMC Decision

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

The FOMC met today and announced it would drive down longer term rates. With the economy recovering slowly and with “significant downside risks to the economic outlook, including strains in global financial markets”, it was deemed necessary to do a lot more than had already been done. Indeed, the size of the program, $400 billion of purchases of assets with maturities of six years or longer offset by sales of assets with maturities of three years or less, is somewhat greater than expected. But given the warning that the modest recovery could get worse, a large program made sense. You either go all in at this point or fold your cards and the Mr. Bernanke has gone all in.

Will this so-called “operation twist” work? Clearly, the emphasis on driving down longer term rates is an attempt to get mortgage borrowing and capital spending going a lot faster. But businesses are flush with cash already and it isn’t rates that are stopping them from hiring or investing more. Companies are just uncertain about the direction of the economy and demand is not growing fast enough to require greater job growth. Households are reducing their debt, not adding to it, and as we saw from today’s National Association of Realtors existing home sales report, failed contracts are growing. That is more an issue of appraisals and cautious lending practices than rate levels.

Where this will work is in the refinancing sphere. If you can get the refinancing done, the additional cash flow will help both consumer and business spending. On the mortgage side, the lowering of rates coupled with the Fed’s decisions to “reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities” should drive down mortgage rates to levels that will entice an awful lot of potential buyers and refinancers. Again, with the issue being appraisals not rates, this may not work that well but you have to give then kudos for trying to help the housing market.

Looking outward, once confidence returns, the lower rates, which should continue well into 2013, will become a major positive. As the economy improves and the desire to borrow grows, the extraordinary low rates will likely lead to rapid increases in borrowing. But that is likely to be in the future, not in the next six months. And it is that potentially strong growth in borrowing that presents the risk of inflation ramping up. But again, that is not right now.

The Fed is in a tough position. Fiscal policy is becoming more restrictive just as the risks to a disappointing recovery from Europe ramp up. The Fed Chairman is betting that any future (2 years or more down the road) inflation pressures can be handled. Instead, Mr. Bernanke wants to do whatever he can to prevent a double-dip. Given the state of confidence and the political gridlock, I believe the risks are worth taking even though three members of the FOMC differed and cast dissenting votes.

One final comment: Politicians of all stripes are taking shots at the Fed. That is their right but it shouldn’t be happening. You cannot say that the recovery is too weak and jobs have to be created and then do nothing, especially if there are dark clouds out there that could rain on the limping parade. Demanding that the Fed to “don’t just do something, stand there” is not reasonable and probably self defeating. The last thing a Fed Chair wants to be perceived as being is intimidated by politicians. An independent Fed, even a wrong-headed Fed, is a lot better than a politically driven Fed and you can be sure that this and every other Fed has not been politically driven.

RE/MAX Connection Realtors disclaimer:
RE/MAX Connection Realtors are not licensed financial advisors, and are not providing any financial advice, you should consult with a licensed financial advisor prior to making any financial decisions. RE/MAX Connection Realtors are only providing this economic statement from Naroff Economic Advisors, Inc. for informational purposes.
Our company accepts no liability for the content of this email/blog, or for the consequences of any actions taken on the basis of the information provided. Any views or opinions presented in this email/blog are solely those of the author and do not necessarily represent those of the company. Finally, the recipient should check this email and any attachments for the presence of viruses. The company accepts no liability for any damage caused by any virus transmitted by this email.
RE/MAX Connection Realtors, 1000 East Lincoln Drive, Suite 2, Marlton, NJ 08053 www.goconnectionnj.com