Economy Watch: New Home Sales Edge Up Unexpectedly

Home sales increased in December; the Fed isn't worried about inflation yet; and--news flash--the federal deficit is out of control.

By Dees Stribling, Contributing Editor

New home sales in December increased an unexpected 17.5 percent compared with the previous month, but it wasn’t enough to rescue the homebuilding industry from its worst year since the U.S. Department of Commerce started keeping track of the industry. Which was during the Kennedy administration.

New homes sold at an annualized rate of 329,000 units in December, which represents a 7.6 percent drop compared with the same month in 2009, the Commerce Department said on Wednesday. All together, some 321,000 new homes were sold in 2010, a 14.2 percent decline from an already abysmal level in 2009.

The government also reported that the median sales price of a new house in December was $241,500, representing an 8.5 percent increase from a year ago. Market inventory of new homes nationwide was about 190,000 in December, which would be a 6.9-month supply at the current crummy sales rate.

Fed stands pat

At the first meeting of the Federal Open Market Committee on Wednesday, radical change in the central bank’s plans wasn’t in the cards. The federal funds rate will be maintained at between 0 percent and 0.25 percent, which will keep the prime rate at 3.25 percent.

The Fed says it isn’t worried about inflation–yet. “Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward,” the central bank said in a statement after the FOMC meeting.

The Fed will also plow ahead with QE2: “The Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011,” the statement continued.

CBO details ballooning deficit

Take a weak economy, mix in tax cuts for everybody and various increases in federal spending, and it’s a recipe for a federal budget deficit of nearly $1.5 trillion in 2011, or about 9.8 percent of GDP, according to Congressional Budget Office estimates published Wednesday. That total is almost as much as in 2009, which saw a deficit at 10 percent of GDP, which was the highest rate since World War II.

The deficit in the 1940s was used to defeat Nazis. Today it fuels spending on entitlements, which neither party has the stomach to take on just yet, despite urgent recommendations of the recent deficit commission. But will an improving economy help things out? “Outlays for many programs are projected to continue to grow and more than offset the decreases in spending (for unemployment compensation, for example) yielded by improving economic conditions,” the suitably glum report answered.

Wall Street registered small gains on Wednesday, with the Dow Jones Industrial Average gaining 8.25 points, or 0.07 percent, almost but not quite enough to break 12,000, a height the index hasn’t seen since before the Panic of 2008. The S&P 500 was up 0.42 percent, and the Nasdaq gained 0.74 percent.

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