There are a couple of interesting stories worth mentioning this morning. The first is from Bloomberg, which talks about the possibility of Congress pressuring the Federal Reserve to continue its housing and mortgage market support next year.
My take? The idea that the Fed will pull back proactively, or will stand up to political pressure, is a total joke. The Fed has become totally politicized, working hand in glove with the Treasury in the past year. There is no way in you-know-where they’ll stand up to pressure to keep supporting the housing market early next year, should that pressure be brought to bear.
More from Bloomberg:
“Federal Reserve Chairman Ben S. Bernanke is gambling that come March, he can stop the purchases of mortgage-backed securities that have propped up the U.S. housing market. Congress may have other ideas.
“The central bank says it must eventually withdraw its unprecedented economic stimulus to avoid a surge of inflation as a recovery takes hold. Plans to buy $1.25 trillion of housing debt are the centerpiece of its program to pull the nation out of the worst recession since the 1930s.
“Bernanke, who convenes a meeting of the Federal Open Market Committee today, is counting on private investors to fill the void left by the Fed when its purchases end. If he’s wrong, he may come under pressure from politicians to maintain support for housing or even extend credit programs for small businesses and consumers. That would threaten the Fed’s ability to conduct an independent monetary policy.
“The nightmare scenario for the Fed would be to see them try to sell their mortgage portfolio, and Congress steps in and tries to stop it on the grounds that the housing market hasn’t fully recovered,” said Ethan Harris, head of North American Economics at Bank of America-Merrill Lynch in New York. “The attempts to influence the Fed in the exit strategy will be pretty strong.”
“The Fed chairman has already come under pressure from lawmakers including Senate Banking Committee Chairman Christopher Dodd of Connecticut and Representative Paul Kanjorski of Pennsylvania, both Democrats, to aid car companies and provide more credit to commercial real estate.”
The second article is in the Washington Post. It talks about how the U.K. is trying to shrink the size of its “Too Big to Fail” banks, forcing them to sell off assets and reduced their overall footprint in order to get more aid.
Here in the U.S., though, our regulators continue to suck up to the TBTF companies. The Obama administration has essentially ignored the advice of Bank of England governor Mervyn King, former IMF Chief Economist Simon Johnson, and even one of its own advisers, former Fed Chairman Paul Volcker. They all think it makes sense to tame these behemoths before they blow themselves up again … and require even more taxpayer-funded bailouts.
More from the Post:
“The British government — spurred on by European regulators — is forcing the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.
“The move to downsize some of Britain’s largest banks comes as U.S. politicians are debating whether American banks should also be required to shrink. The Obama administration has maintained that large banks should be preserved because they play an important role in the economy and that taxpayers instead should be protected by creating a new system for liquidating large banks that run into problems. But Britain’s decision already is being cited by a growing chorus of experts, including prominent bankers and economists, who want the United States to pursue a similar approach.”
We just got pending home sales figures from the National Association of Realtors. Here’s what they looked like:
* Pending home sales surged 6.1% in September. That was much better than the unchanged reading that economists were expecting. It’s also the eighth consecutive monthly rise.
* On a year-over-year basis, the pending sales index jumped 21.1% to 110.1 from 90.9. That’s the highest index value since December 2006.
* Regionally, pendings were relatively strong. They rose 4.9% in the South, 8.1% in the Midwest, and 10.2% in the West. Sales dropped 2% in the Northeast.
The existing home market continues to heat up, fueled by cheaper house prices and the first-time buyer tax credit. Pending sales have climbed for eight straight months, and contract signings haven’t been running this hot in almost three years.
Clearly, buyers were eager to get business done before the credit’s November expiration. So I wouldn’t be surprised to see some giveback in pending sales over the next month or two. But with Congress set to extend the credit through mid-2010 … and expand it to a broader pool of potential buyers … the market should remain fairly well-supported. In other words, the “three steps forward, two steps back” recovery in housing remains on track.
The latest S&P/Case-Shiller home price index figures were just released. On a month-over-month basis, prices were up 1.2% in 20 top metropolitan areas in August. That marked the fourth consecutive monthly gain. On a year-over-year basis, home prices were down 11.3%. That was better than the 11.9% decline economists were expecting and an improvement from the 13.3% drop in July. All 20 cities are still showing YOY declines, but the rate of depreciation is moderating. The best market? Dallas at -1.2%. The worst? Las Vegas at -29.9%.
The September existing home sales figures recently hit the tape. Here’s what the numbers looked like:
* Existing home sales jumped 9.4% to a seasonally adjusted annual rate of 5.57 million units from 5.09 million in August. That was twice the gain that was expected and the rate of sales was the highest since July 2007.
* Single-family sales gained 9.4%, while condo and cooperative sales rose 9.7%. By region, sales climbed across the board. They were up 4.4% in the Northeast, 9% in the South, 9.6% in the Midwest, and 13% in the West.
* The raw number of homes for sale dropped 7.5% to 3.63 million units from 3.924 million in August. Supply was off 15% from a year earlier. The months supply at current sales pace indicator of inventory dropped to 7.8 from 9.3. Single family inventory dropped to 7.6 from 9, while condo inventory fell to 11 from 12.1.
* The median price of an existing home fell 1.4% to $174,900 from $177,300 in August. That was off 8.5% from $191,400 in the year-ago period.
September was a blockbuster month for existing home sales. The looming expiration of the tax credit, combined with stabilization in the broader economy and cheap home prices, drove sales to the highest level we’ve seen in a couple of years. The supply of used homes for sale is also steadily declining, an encouraging trend considering that new home inventory has already dropped like a rock.
If there’s a fly in the ointment, it’s concern about the “pull forward” effect. Clearly, some buyers purchased a home this summer because of the tax credit and the tax credit alone. Unless that credit is extended or expanded, we’ll see “give back” in the coming couple of months. I don’t think it derails the overall recovery. That’s being driven by true, fundamental forces, such as the dramatic improvement in housing affordability. But it will be noticeable nonetheless.
Our “What me, Worry?” Fed Chairman Ben Bernanke may not care about the falling dollar. But foreign central banks are getting seriously peeved about the strength in their currencies against the ever-depreciating dollar …
* The Bank of Canada released a statement today saying that “heightened volatility and persistent strength in the Canadian dollar are working to slow growth … the current strength in the dollar is expected, over time, to more than fully offset the favorable developments since July.”
* European Central Bank President Jean-Claude Trichet warned again about “excessive volatility” in exchange rates, while a French economic advisor said the current EURUSD exchange rate is a “disaster for the European economy.”
* In Brazil, the carry trade (borrow cheap dollars, invest the money in higher-risk, higher-yield assets) is so out of control the government just slapped a tax on foreign investors in Brazilian assets. A 2% levy will apply to foreign purchases of Brazilian fixed-income securities and stocks, effective immediately.
* Minutes of the latest Reserve Bank of Australia meeting showed that officials were very concerned about the side effects of recklessly easy money. The minutes suggested that a “very expansionary setting of policy was no longer necessary, and possibly imprudent.” The RBA surprised the world recently by becoming the first Group of 20 central bank to raise rates, albeit by a quarter point to 3.25%.
Bottom line: Washington doesn’t care about letting the dollar circle the drain. The Fed may want to keep U.S. rates at effectively zero until the next millennium. But Canada doesn’t much like the surging loonie, the ECB hates the euro surge, Brazil isn’t thrilled about the exploding real, and Australian officials are clearly firing a shot across Bernanke’s bow.
The problem is that unless and until Bernanke signals a policy shift in the interest rate market, they’re spitting in the wind.
We just got the latest data on housing starts and permits. Here’s what the numbers showed:
* September housing starts inched up by 0.5% to a seasonally adjusted annual rate of 590,000 from a downwardly revised 587,000 in August. Single family starts rose 3.9%, while multifamily starts dropped 15.2%. Starts are still down 28.2% from year-earlier levels, but that’s a smaller decline than the 40%+ YOY drops we were seeing in the spring.
* Building permits dipped 1.2% to 573,000 from 580,000 a month earlier. Single family permits dropped 3% … the first decline since March … while multifamily permits gained 6%.
* On a regional basis, starts dropped in 3 out of 4 regions, with the West down 8.8%, the Northeast off 5.5% and the Midwest down 1.8%. Starts rose 7.1% in the South. Permitting activity fell in 2 out of four regions (-1.7% in the South and West), while holding stable in the Northeast and Midwest.
After a steady upward march, the housing market appears to be stopping to catch its breath. Housing starts have leveled off, while single family permits showed their first dip in six months. Builders are growing more hesitant for a few reasons: The “Cash for Cottages” tax credit is about to expire … job growth is MIA … and consumer confidence is cooling a bit.
This doesn’t mean the recovery is over. The sum total of the indicators I follow still suggest the worst of the downturn is behind us (with the exception of home prices — those will likely continue to fall over the next year, albeit at a more gradual pace). But the recovery will be far from vigorous. Rather, it will be a gentle, halting, drawn out affair. Think three steps forward, two steps back here.
The latest National Association of Home Builders index was just released. The index fell to 18 in October from 19 in September. The subindex tracking present sales fell to 17 from 18, the subindex tracking expectations about future sales dropped to 27 from 29, and the subindex measuring prospective buyer traffic slumped to 14 from 17.
Regionally speaking, we saw weakness in three out of four parts of the country. The index that tracks activity in the West fell the most — to 14 from 18 — while the index that tracks activity in the Northeast was the lone bright spot, rising to 25 from 24. Both the Midwest and South indices dipped to 18 from 19.
We saw auto sales slump after the “Cash for Clunkers” program expired. Now we’re seeing a similar hangover in housing thanks to the looming expiration of the “Cash for Cottages” tax credit. Specifically, all three subindices in the NAHB report declined, as did three out of four regional indices.
The overall housing recovery remains on track, with new home inventories falling substantially and low home prices helping to bring some buyers off the sidelines. But these latest figures underscore my belief the recovery will be a drawn out, gradual affair as opposed to a vigorous “V-shaped” rebound.
Just a thought, but maybe we should call our Federal Reserve Chairman the “Bernanke-nator.” As Kyle Reese said in the original Terminator movie … “Listen, and understand. That terminator is out there. It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever, until your dollars are worthless.”
Okay, the last part of that quote was ACTUALLY “until you are dead.” But you get the idea. Ha-ha!
Okay, so that’s not the headline you’re going to read on the wires. But really, his speech at the Conference on Asia and the Global Financial Crisis in Santa Barbara, California is very academic. It’s focused on longer-term trade and growth issues, and frankly, I don’t see any explicit or implicit comments directed at the markets besides the following summary paragraph. And even that paragraph basically just restates the “on the one hand, on the other hand” view about stimulus — without giving any indication as to whether Bernanke is migrating toward one camp or the other:
“Despite the initial successes of Asian economic policies, risks remain. As in the advanced economies, unwinding the stimulative policies introduced during the crisis will require careful judgment. Policymakers will have to balance the risks of withdrawing policy support too early, which might cut short a nascent recovery, against the risks of leaving expansionary policies in place for too long, which could overheat the economy or worsen longer-term fiscal imbalances. In Asia, as in the rest of the world, the provision of adequate short-term stimulus must not be allowed to detract from longer-term goals, such as the amelioration of excessive global imbalances or ongoing structural reforms to increase productivity and support balanced and sustainable growth.”
Bottom line: I doubt these comments will do much for the beleaguered dollar, which was weakening into the release of Bernanke’s remarks at 11 a.m. Indeed, I believe Bernanke’s silence on the greenback speaks volume about how much he cares (read: not at all, as I spelled out last week).
You have to love it: The just released Fed minutes from the September 22-23 meeting are looking unbelievably dovish. Some Fed members were reportedly even open to INCREASING the size of MBS purchases. This from a Fed whose quantitative easing policies are driving the dollar into the crapper. Seriously? Meanwhile, the Fed minutes note that “with the significant under-utilization of resources expected to persist through 2011, the staff forecast core inflation to slow somewhat further over the next two years from the pace of the first half of 2009.”
In other words, if you think this Fed is going to tighten rates anytime soon, you have to be nuts!
