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

August Existing Home Sales

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.

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