WEEK OF NOVEMBER 26, 2007—BERNANKE’S PROMISE

Fed Chairman Ben Bernanke recently made a promise that the Fed will be “flexible” in doing what needs to be done to bolster the financial markets. This is after he and other Fed Governors had hinted at the October FOMC meeting that they were done with lowering interest rates this year. But news of further hemorrhaging of the credit markets and plunging stock prices have alarmed the Fed enough to reverse their stance.

“These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors.” said Bernanke, in a speech to his home state North Carolinians.

“Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy.”

Yet overall economic activity hasn’t slowed to date. In fact, it has picked up with third quarter GDP growth revised upward from 3.9 percent to 4.9 percent after 3.8 percent growth in Q2, and consumer spending increasing at a 5.2 percent clip. New home construction and sales also rose slightly in the latest October surveys.

What has tipped the Fed’s thinking is perhaps its most recent Beige Book report, an anecdotal survey of activity in the 12 Federal Reserve Bank Districts. It basically announced that the slowdown has arrived, noting that 7 of the 12 districts reported a slower pace of growth, with the remainder describing conditions as moderate or mixed.

What probably alarmed Fed officials most was evidence that the financial market turmoil is impacting the credit markets. Business loans were down and standards for consumer loans were up. The report found soft retail sales and pessimism about the holiday season from retailers, who were also concerned that goods were beginning to pile up on store shelves.

But real estate had some good news in October, as it showed a leveling out of activity.

HOUSING STARTS—A 3 percent rise in new-home construction was mostly due to a surging demand for apartment units, as rental rates rise. But many of these renters will eventually go back to buying homes when housing prices have stabilized.

NEW-HOME SALES—New home sales rose 1.7 percent, probably because builders are offering plenty of incentives, including lower prices. The Midwest region increased a whopping 14.2 percent, 6.8 percent in the South. Sales dropped 15.7 percent in the West, however.

EXISTING-SALES—Sales fell just 1.2 percent in October, while the median price declined 5.1 percent, the largest year-over-year price drop ever recorded, according to the NAR.

NAR chief economist Lawrence Yun said, “I don’t anticipate any further major sales declines,” unless there is further overall economic deterioration. Yun expects 5.67 million in existing home sales in 2007, the fifth best year ever for real estate sales. There is already a pent up demand from so-called Generation X and Y buyers, said Yun. Generation Y buyers born in 1980-1996 are the children of the baby boomers who fueled the last housing boom, and will have as much buying power as their parents when they come of age.

We are now all waiting for the Fed’s December 11 FOMC meeting. The financial markets are anticipating at least a quarter to one-half percent rate drop at that time.

Copyright © 2007