Economy Watch: Existing Home Sales Take a Dive

Tight credit contributes to home sales dropping; the Treasury will start selling some of the mortgage-backed securities it acquired after the 2008 crash; and the Chicago Fed's National Activity Index registers a downtick.

By Dees Stribling, Contributing Editor

Existing homes sales dropped 9.6 percent in February compared with January, according to the National Association of Realtors on Monday. The annualized rate fell from 5.4 million units to 5.02 million units month-over-month. The decline came on the heels of three months’ gains in existing home sales.

Also according to NAR, the national median existing-home price for all housing types was $156,100 in February, down 5.2 percent from the same month in 2010. Distressed properties, which have been instrumental in driving that median price down, accounted for a 39 percent market share of home sales in February, up from 37 percent in January and 35 percent in February 2010.

The typically optimistic Lawrence Yun, chief economist at NAR, notes in a statement the market would be better but for a couple of obstinate conditions related to an abundance of caution among lenders and real estate appraisers. “Housing affordability conditions have been at record levels, and the economy has been improving,” he says. “But home sales are being constrained by the twin problems of unnecessarily tight credit, and a measurable level of contract cancellations from some appraisals not supporting prices negotiated between buyers and sellers.”

Treasury to unload its MBS holdings

The U.S. Department of the Treasury said on Monday that it will start selling a selection of the mortgage-backed securities that it acquired in the aftermath of the Panic of 2008. All together, Treasury holds about $142 billion in such bonds, a fraction of the $1 trillion or so now possessed by the Federal Reserve, but a healthy pile nonetheless.

The sales will begin at once and amount to roughly $10 billion a month. Considering that the MBS market totals about $4.6 trillion, sales of a mere $10 billion are unlikely to affect mortgage rates. But the sales will be a kind of bellwether to see if buyers are interested, ahead of the time when the Fed starts to sell its MBS horde.

Ultimately, if all the sales go according to plan, Treasury will turn a profit on its MBS, possibly as much as $20 billion. “We’re continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort,” Assistant Treasury Secretary for Financial Markets Mary J. Miller says in a statement.

Chicago Fed National Activity Index down slightly

The Chicago Fed said on Monday that its National Activity Index registered a downtick in February to -0.04, compared with -0.01 in January. The index is a weighted average of 85 monthly economic indicators, with a positive reading corresponding to growth above trend and a negative one corresponding to growth below trend.

So growth in February was slightly below trend, but that isn’t particularly bad news. The Chicago Fed also notes that employment-related indicators made a +0.30 contribution to the index in February, up from the previous month’s +0.05 contribution. Also, the index’s three-month moving average increased to +0.11 last month, up from +0.05 in February.

Despite unsettling international news, Wall Street was in a buying mood on Monday, with the Dow Jones Industrial Average spiking up 178.01 points, or 1.5 percent, erasing much of the panic losses during the week after the disaster in Japan. The S&P 500 gained 1.5 percent as well, and the Nasdaq was up 1.83 percent.

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