Fed Reserve: Housing Sales and Starts Have Flattened Out at Depressed Levels; Foreclosures Likely To Remain High

Dennis Norman

At the Federal Open Market Committee meeting on March 16th it was suggested that “economic activity expanded at a moderate pace in early 2010″. Unfortunately, when it came to the housing market, the news was not as good and it was noted that “housing activity remained flat and the nonresidential construction section weakened further.”

The staff went on to say that activity in the housing sector appears to “have flattened out in recent months” and that “sales of both new and existing homes have turned down, while starts of single-family homes were about unchanged despite the substantial reduction in inventories of unsold new homes.” The feeling was that some of the recent weakness in home sales may have been due to buyers that rushed to buy in anticipation of the first-time homebuyer tax credit that was originally expected to expire in November, 2009.

Other concerns about the housing market that were expressed by participants in the meeting included the concern that activity appeared to be leveling off in most regions despite various forms of government support, and that the commercial and industrial real estate markets “continue to weaken”. The fact that “housing sales and starts had flattened out at depressed levels” suggests that the previous improvements in the housing market may have largely been a result of the homebuyer tax credit “rather than a fundamental strenthening of housing activity.“

On another negative note for the housing markets, the meeting participants indicated that “the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters.” Adding; “the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices.” (hmm…sounds familiar, what real estate blogger has been talking about this for a while and expressing concern? oh yeah, me :)

The committee also confirmed, as I have discussed was coming in other posts, that the Fed was going to complete their purchase of the $1.25 trillion worth of mortgage-backed securities by the end of March that they committed to in an effort to add liquidity to the mortgage market and would discontinue purchasing the securities after that. Thus far this has not had much effect on interest rates but I think it will take a month or so to see where things shake out.

So, in a nutshell, the Fed doesn’t think the housing market is out of the woods yet; the government stimulus may have done nothing more than creaate a temporary “false market” (I’ve talked about this point here before too) and that the housing sector may continue to be a drag on the economy for a while.