Pending Home Sales Fall to Record Low; Fed Sees Negative Growth

MBA (4/9/2008 ) Velz, Orawin
The number of potential homebuyers signing contracts to buy previously owned homes declined in February. The National Association of Realtors’ Pending Home Sales Index fell 1.9 percent in February to 84.6. This is the lowest reading since the index’s inception in 2001. From last February, the index was down 21.4 percent.
The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closing, as the signed contract for the purchase of a home generally precedes its closing by one to two months. Last month, NAR reported that February total existing home sales saw the first increase in seven months. The drop in pending home sales suggests that existing home sales should resume their declining trend in the near term.

Recent aggressive actions by the Federal Reserve have failed to spur housing demand, given tighter lending standards, softening labor market and higher risk premiums. While the 10-year Treasury yield—the benchmark for fixed mortgage rates—declined considerably in March and remained low in early April, the spread between the 10-year and conforming mortgage yields has remained wide at about 230 basis points. In addition, the jumbo market continued to be stressed, with the spread between jumbo and conforming rates widening to about 150 basis points.

Also yesterday, the Federal Reserve released minutes from the March 18 Federal Open Market Committee meeting. At that meeting, the FOMC reduced the federal funds rate 75 basis points, to 2.25 percent. While the FOMC members did not use the word recession during their discussion, they acknowledged that the Fed’s new forecast showed a “substantial” downward revision of growth outlook. Economic growth is likely to contract in the first half followed by a slow growth in the second half.

Some members noted that they found little signs that housing market has reached bottom. Members added that there was a risk that the economic slowdown could continue into 2009 if the housing and financial markets do not improve. There were concerned that an “adverse feedback loop” could restrict credit, hurting economic activity and thus causing lending to contract further. They also noted that financial market stress, combined with declining home prices, could lead to a "more severe" and "protracted downturn."

Members also expressed concerns about inflation, especially from the pass-through of rising energy prices. Finally, members admitted that interest rate cuts alone might not be enough to deal with underlying problems in the housing and financial markets.

Long-term yields were little changed. The yield on 10-year Treasuries rose three basis points and hovered around 3.56 percent by mid-Tuesday afternoon.