By Jason Simpkins
Staff Writer
The number of pending home sales nationwide dropped to its lowest level in nearly six years in July, the National Association of Realtors said yesterday (Wednesday). The NAR’s index of signed purchase agreements dropped by 12.2% in July after advancing 5% in the month previous. The index is down 16.1% from a year ago. As a result, stocks dove yesterday, while Treasury notes jumped.
July’s 89.9 was the second-lowest rating on record for the index. It has only been trumped once in the aftermath of the terrorist attacks on Sept. 11.
Considering all of the misfortunes the midsummer had to bring it comes as no surprise that the gauge dropped. But the extent of downturn and its precise timing was cataclysmic. As economist Joel Naroff of Naroff Economic Advisors characterized it: “With pending home sales collapsing before the mortgage credit crunch hit, the outlook for housing becomes even more disconcerting.”
As a result, stocks took a hard spill Wednesday. The Dow Jones slipped 143.39 points (1.07%) to close at 13,305.47. The tech-laden Nasdaq Composite Index and S&P 500 dropped 24.29 points (0.92%) to close at 2,605.95, while the broader Standard & Poor’s 500 Index declined 17.13 points 1.15%) to close at 1,472.29.
While many suspect Chairman Ben S. Bernanke and the Federal Reserve may cut rates, few believe it is likely to happen before the next scheduled meeting of the policymaking Federal Open Market Committee (FOMC) on Sept.18, nearly two weeks away.
Political Wrangling
Congressional Democrats promoting legislative solutions to the mortgage-market crisis said Wednesday that a Bush administration fails to protect homeowners who face huge increases in their monthly payments due to billions of dollars worth of adjustable-rate mortgage “resets” in the month ahead.
A top Bush administration official said the complete economic impact of the worst housing slump in 16 years and the ensuing subprime mortgage debacle and growing global credit crunch has yet to be seen. But it’s likely to get worse.
Federal regulators such as Robert Steel, Treasury undersecretary for domestic finance, joined other federal regulators in assuring lawmakers that the markets are being monitored for major shifts. But Democrats said concrete action is needed through new legislation to keep the crisis from worsening. Steel was among several regulators who appeared before the House Financial Services Committee, where he stressed that the sure in housing defaults should be muted by fairly strong economic growth.
The Fed Comments
Despite the pain of the credit crunch, the impact on the rest of the economy really appears to so far be very limited, the Federal Reserve reported yesterday.
Institutional and individual investors alike have been awaiting the central bank’s business-conditions survey. The reason: They want some clue as to what Fed policymakers might do with short-term interest rates when the FOMC meets on Sept. 18, its next regularly scheduled meeting.
Economists increasingly believe the Fed at that meeting will lower the benchmark Federal Funds rate – a key interest rate – by at least a quarter of a percentage point from its current level of 5.25%. The central bank hasn’t lowered this rate for four years.
According to the Fed report, “outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited.”
Stocks dropped in a disappointed response to the report; investors apparently had been hoping for stronger guidance that interest rates would be reduced this month
The report failed to “make a clear case for the Fed to ease,” T.J. Marta, an RBC Capital Markets fix-income investment strategist, told The Associated Press.
The housing downturn first spread to the subprime-mortgage market – which made sense, as those borrowers had questionable credit histories. But in the latter part of the summer, the problems engulfed more creditworthy borrowers, seriously rattling Wall Street. In response, the Fed and other central banks worldwide have injected tens of billions of dollars into the world financial system. And the U.S. Fed cut its Discount Rate, the rate it charges banks who needed to borrow to maintain reserve requirements. But it’s doggedly refused to cut the Fed Funds rate, which would translate quickly into reduced borrowing costs for consumers.
In a speech to the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, last Friday, Bernanke, the Fed chairman, pledged that the central bank would “act as needed” to limit any economic fallout. But he made it very clear that the central bank would act only in the economy’s best interest – and would not bail out speculators and lenders.
In the survey released yesterday, the Fed said most banks reported that the recent financial-market developments were leading to more-restrictive lending practices for banks.
The survey is based on information that the Fed’s 12 regional banks collected before Aug. 27
After a five-year surge, the U.S. housing market fell into a deep decline last year. It worsened this year.