Current conditions in the housing market remain grim which is why the Fed has cut rates drastically to spark lending and promote economic growth, according to Hanley Wood Market Intelligence.

An Historic Rate
Early last week, the Federal Open Market Committee cut the Fed Funds rate to its lowest levels ever in an historic move to revive the economy. The Fed set a target range for the Federal Funds rate from 0% - 0.25%, down from 1%. Slower global economic activity has continued to fuel the drop in crude prices and has started to push overall prices lower. In the attached statement, the Fed stated that “the outlook for economic activity has weakened further.” It was also stated that “inflationary pressures have diminished appreciably.”

The consumer price index recorded its largest monthly drop in history in November due to falling energy prices and slower global economic growth. Falling prices could potentially offset the intended effects of the Fed’s policy moves because it may further reduce consumer spending while employment will continue to suffer as businesses struggle. But at the current time, most of the declining price pressure is caused by falling energy prices which only have so much further to fall before they stabilize. So while deflation is a real concern, it is still far too early to make any assumptions.

Although rates have fallen to historic lows, it doesn’t seem to be translating into more home sales. According to the Mortgage Bankers Association, nearly 77% of all mortgage activity last week were refinances. So while many are taking advantage of the lower interest rate environment to reduce their monthly housing costs, it is not bringing new buyers into the market, at least not yet. New and existing home data to be released tomorrow may give more indication of the effects that lower rates have had on sales and pricing in the past month. Builder confidence in December remained at an all-time low as November housing starts fell to its lowest level on record.

Despite production cuts announced by OPEC last week, the price of crude oil continues to fall due to expectations for lower demand. Crude has now fallen to its lowest levels in over four years and is down nearly 73% from its record highs set in July. Crude for February delivery fell to end trading at just under $40/barrel on Monday. The precipitous drop in energy prices has been the biggest contributor to falling price levels in the past several months.

The Economy
The leading index experienced a 0.40 point drop in November from a downwardly revised October figure. The leading index now stands at 99.00, down from a downwardly revised October figure of 99.40. Leading economic indicators have not recorded a monthly increase since April which further signals a downward trend for the economy going forward.

Total housing starts fell 18.9% in November to a seasonally-adjusted annual rate of 625,000 units which is the lowest since 1959 when the Commerce Department started keeping record of the data. Starts in both single and multi-family units experienced significant declines, falling 16.9% and 26.9% respectively. Building permits also experienced steep declines, falling 15.6% from the previous month to a seasonally-adjusted annual rate of 616,000 units.

November's consumer inflation data showed price pressures easing further as energy costs plunged in November. This is the fourth straight month that consumer prices have declined. The Consumer Price Index in November declined 1.7% on a seasonally-adjusted basis which is the largest monthly drop on record. Energy prices plunged 17.0% from last month while transportation costs declined 9.8% which helped fuel the drop in headline consumer prices.

Housing Market
In the week ending December 12, the MBA’s seasonally-adjusted Purchase Index declined to 286.1 from 298.1 in the previous week. This is the second straight week that purchase applications have declined although refinance activity remains strong due to falling fixed-mortgage rates. The latest figure reflects a 4.03 percent decline from last week and a 32.24% drop from the same period last year. The share of adjustable-rate mortgage activity remained at record-low levels at 1.1% of total mortgage applications in the past week due very favorable fixed mortgage rates. National average mortgage rates declined to 5.19% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on December 18th. This is the seventh straight week that mortgage rates have declined. This is the lowest average fixed mortgage rate on record since Freddie Mac started the Primary Market Mortgage Survey in 1971.

October turned out to be one of the worst months for home sales as tight credit conditions created by turmoil in the financial markets along with rising unemployment stalled home-buying activity. Both new and existing home sales posted drops in October. New home sales in October fell 5.3% to a seasonally-adjusted annual pace of 433,000 units. Seasonally-adjusted annualized new home sales are at their lowest levels since January 1991. Sales for the previous three months, however, were revised lower by 17,000 units. The number of new homes for sale continued to decline as builders continue to scale back production. New home inventory declined to 385,000 which is the lowest it has been since June 2004. In October, median new home prices fell to $218,000 from an upwardly revised September figure of $221,700. This is the lowest median new home price recorded for any month since September 2004.

Annualized sales of total existing homes in September dropped 3.1% from September levels to 4.980 million units. Sales of existing homes are down 1.6% from the 5.060 million units in October 2007. Median existing home prices in September declined to $183,300 which is the lowest it has been since March 2004 and the fourth straight month that median existing home prices have recorded a decline. Inventory figures continued to improve last month as the number of existing homes for sale fell for the third straight month to a preliminary 4.234,220 units for sale. Inventory levels are now at their lowest since March.

For market-level data and analysis please visit our website at http://www.hwmarketintelligence.com. For more detailed information on the indicators discussed in this key indicator alert, please visit the following links:

 

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