Karim writes:

Yes, contrary to my opinion. This about managing expectations. With falling inflation and unemployment this high it makes no sense that they would be holding back something that could make a material difference.

Agreed.

Again, if they did have anything that would substantially increase agg demand they’d have done it.

Yes, and, again, it’s doubtful lower credit spreads will do much for the macro economy but would shift a lot of credit risks to the Fed for very little gain.

FRB: Bernanke, The Economic Outlook and Monetary Policy

At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily.

That is not correct. Fiscal adjustment can sustain demand at any politically desired level.

For a sustained expansion to take hold, growth in private final demand–notably, consumer spending and business fixed investment–must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way.

Agreed that hand off is slowly materializing and private sector debt expansion will then drive additional growth. But sustained expansion could come immediately from a fiscal adjustment as well.

However,although private final demand, output, and employment have indeed been growing for more than a year, the pace of that growth recently appears somewhat less vigorous than we expected.

Agreed.

Among the most notable results to emerge from the recent revision of the U.S. national income data is that, in recent quarters, household saving has been higher than we thought–averaging near 6 percent of disposable income rather than 4 percent, as the earlier data showed.

Non govt net savings of financial assets = govt deficit spending by identity, and with foreign sector savings relatively constant, the majority of the increase is in the domestic economy, either businesses or households.

That means in general household savings goes up with the deficit regardless of the level of consumer spending.

However, when household savings does start to fall, it’s due to household credit expansion, at which time, if the deficit is unchanged, the savings of financial assets is shifted to either the business or the foreign sector.

And, as growth accelerates, the automatic fiscal stabilizers- increased federal revenues and falling transfer payments- reduce the deficit and therefore reduce the growth in the total net savings of the other sectors.

So the hand off process is usually characterized by the federal deficit falling as private sector debt expands to ‘replace it.’

This continues until the private sector again necessarily gets over leveraged, ending the expansion.

3 On the one hand, this finding suggests that households, collectively, are even more cautious about the economic outlook and their own prospects than we previously believed.

At best his means that he thinks with this much savings households would start leveraging more.

But on the other hand, the upward revision to the saving rate also implies greater progress in the repair of household balance sheets. Stronger balance sheets should in turn allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves.

Yes, as I explained. He seems to understand the sequence of the data but doesn’t seem to be quite there on the causation.

Going forward, improved affordability–the result of lower house prices and record-low mortgage rates–should boost the demand for housing. However, the overhang of foreclosed-upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet

Yes, which is a traditional source of private sector credit expansion, along with cars, that drives the process.

Generally speaking, large firms in good financial condition can obtain credit easily and on favorable terms; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets. For these firms, willingness to expand–and, in particular, to add permanent employees–depends primarily on expected increases in demand for their products, not on financing costs.

I couldn’t agree more!
Employment is primarily a function of sales as discussed in prior posts.

Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes. The Federal Reserve, together with other regulators, has been engaged in significant efforts to improve the credit environment for small businesses. For example, through the provision of specific guidance and extensive examiner training, we are working to help banks strike a good balance between appropriate prudence and reasonable willingness to make loans to creditworthy borrowers. We have also engaged in extensive outreach efforts to banks and small businesses. There is some hopeful news on this front: For the most part, bank lending terms and conditions appear to be stabilizing and are even beginning to ease in some cases, and banks reportedly have become more proactive in seeking out creditworthy borrowers.

Another problem is that the regulators are forcing small banks to reduce what’s called ‘non core funding’ in a confused strategy to enhance small bank ‘deposit stability.’ Unfortunately, at the local level the regulators have interpreted the rules to mean, for example, it’s better for a small bank’s financial stability to fund, for example, a 3 year business loan with 1 year local deposits, vs funding it with a 5 year advance from the Federal Home loan bank. It’s also a fallacy of composition, as at the macro level there aren’t enough core deposits to fund local small businesses, as many larger corporations and individuals use money center banks and leave their deposits with them. The regulatory insistence on small banks using ‘core deposits’ rather than ‘wholesale funding’ recycled from the larger banks causes a shortage of local deposits and forces the small banks to pay substantially higher rates as they compete with each other for funding artificially limited by regulation.

In lieu of adding permanent workers, some firms have increased labor input by increasing workweeks, offering full-time work to part-time workers, and making extensive use of temporary workers.

Yes, and when you include this growth in employment the economy is doing better than most analysts seem to think.

Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors. Generally, the arithmetic contribution of net exports to growth in the gross domestic product tends to be much closer to zero, and that is likely to be the case in coming quarters.

Also, part of the hand off will be US consumers going into debt (reducing savings) to buy foreign goods and services, which increases foreign sector savings of financial assets.

Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year. Much of the unexpected slowing is attributable to the household sector, where consumer spending and the demand for housing have both grown less quickly than was anticipated. Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.

Agreed.

Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.

Agreed.

Monetary policy remains very accommodative,

Yes, for many borrowers, but the lower rates have also net reduced incomes. QE alone resulted in some $50 billion of ‘profits’ transfered to the Treasury from the Fed that would have been private sector income, for example.

and financial conditions have become more supportive of growth, in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there.

Agreed.

Banks are improving their balance sheets and appear more willing to lend.

Agreed, though via a reduction in interest earned by savers that’s gone to increased net interest margins for banks.

Consumers are reducing their debt and building savings, returning household wealth-to-income ratios near to longer-term historical norms.

Yes, ‘funded’ by the federal deficit spending.

Stronger household finances, rising incomes, and some easing of credit conditions will provide the basis for more-rapid growth in household spending next year.

Yes, and that basis is credit expansion.

On the fiscal front, state and local governments continue to be under pressure; but with tax receipts showing signs of recovery, their spending should decline less rapidly than it has in the past few years. Federal fiscal stimulus seems set to continue to fade but likely not so quickly as to derail growth in coming quarters.

Yes, and traditionally matched or exceeded by private sector credit expansion as above.

Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run. With inflation expectations reasonably stable and the economy growing, inflation should remain near current readings for some time before rising slowly toward levels more consistent with the Committee’s objectives. At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low. Of course, the Federal Reserve will monitor price developments closely.

The channels through which the Fed’s purchases affect longer-term interest rates and financial conditions more generally have been subject to debate.

With the debate subsiding as more FOMC participants, but far from all of them, seem to be coming to understand the quantity of the reserves per se has no consequences.

I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve’s purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed’s strategy relies on the presumption that different financial assets are not perfect substitutes in investors’ portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

This is evidence Bernanke himself has come around to the understanding that the quantity of reserves at the Fed per se is of no further economic consequence.

We decided to reinvest in Treasury securities rather than agency securities because the Federal Reserve already owns a very large share of available agency securities, suggesting that reinvestment in Treasury securities might be more effective in reducing longer-term interest rates and improving financial conditions with less chance of adverse effects on market functioning.

Again, it shows the understanding that QE channel is price (interest rates) and not quantities.
This is a very constructive move from understanding indicated in prior statements.

Also, as I already noted, reinvestment in Treasury securities is more consistent with the Committee’s longer-term objective of a portfolio made up principally of Treasury securities. We do not rule out changing the reinvestment strategy if circumstances warrant, however.

In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.

Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists–namely, that the FOMC increase its inflation goals.

In my humble opinion those tools carry no risk and provide no reward to the macro economy.

Looks to me like maybe the payback has run its course.
I’d look for a rebound through the orange line I drew.

The only problem is there aren’t a lot of actual houses for sale.
So a pick up in housing starts can’t be far off either as they are very low given 1-3% GDP growth supported mainly by income helped by the govt deficit spending, lower home prices, and reasonable mortgage rates?

And yes, the surviving companies are those that have figured out how to make money in this environment, and most have massive operating leverage should GDP pick up to more normal recovery levels.

Still looks to me like over the next few years the big money will be lost by being out of stocks given where it seems we are in this cycle.

Unless Congress gets serious about near term deficit reduction. So far it’s pretty much all talk, but who knows!

On Wed, Aug 25, 2010 at 10:48 AM, wrote:

The payback from the expiry of the government’s tax program has been horrific. As can be seen from the chart, new home sales are at multi-decade lows. Existing sales yesterday were alarmingly poor. Despite this news, homebuilders are doing better, no doubt helped by Toll Brothers’ earnings today which were significantly better than expected.

Karim writes:

New Purchase index down a tad but remains reasonably flat after correcting when the home buying credit expired.

Yesterday, Minny Fed President Kocherlakota talked about last week’s FOMC:

“The FOMC’s decision has had a larger impact on financial markets than I would have anticipated. My own interpretation is that the FOMC action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted. I would say that there is no new information about the current state of the economy to be learned from the FOMC’s actions or its statement.”

Agreed. Q2 earnings good with Q2 gdp probably around 1%. Q3 GDP estimates still around 2.5% should be good further support earnings.

Modest growth not enough to bring down unemployment for a while, good for stocks however.

This was my interpretation but nice to hear an FOMC member say so.

And this from page 1 of today’s FT:

Call centre workers are becoming as cheap to hire in the US as they are in India, according to the head of the country’s largest business process outsourcing company.

Link

All above reasonably positive news…..

Yes, for stocks.
But not if you are a call center worker, or anyone else looking for a job…

Karim writes:

I tend to agree with Karim and Fed Chairman Bernanke.
Modestly improving GDP growth with unemployment coming down very gradually until a consumer credit expansion takes hold.

Good for stocks, not so good for most of the people still struggling to survive, as the Obama administration continues to preside over what might be the largest transfer of wealth from bottom to top in the history of the world.

And no credible energy policy. We are completely at the mercy of the Saudis who can unilaterally hike prices any time they feel like it.

Karim writes:

• “Business in July was strong, the best month since October 2008.” (Fabricated Metal Products)
• “Slow economy has killed sales for new equipment orders.” (Machinery)
• “Quoting activity and sales are slow, and backlog is dropping.” (Computer & Electronic Products)
• “Business continues to be sluggish and has fallen slightly as the economic ills continue.” (Nonmetallic Mineral Products)
• “Retailers are still unwilling to gamble on inventory.” (Printing & Related Support Activities)

Bernanke

While the support to economic activity from stimulative fiscal policies and firms’ restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions. In the business sector, investment in equipment and software has been increasing rapidly, in part as a result of the deferral of capital outlays during the downturn and the need of many businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

To be sure, notable restraints on the recovery persist. The housing market has remained weak, with the overhang of vacant or foreclosed houses weighing on home prices and new construction. Similarly, poor economic fundamentals and tight credit are holding back investment in nonresidential structures, such as office buildings, hotels, and shopping malls.

Seems the fall off after the tax credit ended April 30th has yet to fully run its course:

US Mortgage Applications Soar on Refinance Demand

July 7th (Reuters) —Refinancing drove total U.S. mortgage applications to a nine-month high last week, while demand for loans to purchase homes sunk to a near 13-year low as buyers remained sidelined after the expiration of federal tax credits.

Mortgage rates stuck around record lows, the Mortgage Bankers Association said on Wednesday, giving homeowners another chance to cut monthly payments by refinancing.

Refinancing requests jumped 9.2 percent in the week ended July 2 to the highest level since May 2009, lifting total applications by 6.7 percent, seasonally adjusted, to the highest level since early October 2009.

Demand for mortgages to buy homes slipped 2 percent. It was the eighth weekly drop in the nine weeks since the federal tax credits for homebuyers expired on April 30.

“For the month of June, purchase applications declined almost 15 percent relative to the prior month and were down more than 30 percent compared to April, the last month in which buyers were eligible for the tax credit,” Michael Fratantoni, MBA’s vice president of research and economics, said in a statement.

The average 30-year mortgage rate was little changed in the week ended July 2, climbing 0.01 percentage point to 4.68 percent.

The borrowing rate lingered just above the record low of 4.61 percent set in March 2009, according to the MBA’s records that date back to 1990.

Fifteen-year mortgage rates rose to 4.11 percent last week from the record low 4.06 percent set the prior week.

Refinancings accounted for 78.7 percent of all applications last week, the highest share since April 2009, the industry group said.

Tepid employment growth and a surprisingly steep slump in pending home sales kept interest rates low.

Home purchases will stay weak over the next few months as the housing market adjusts to the end of government incentives, and prices should bottom around the third quarter, said Robert Andrews, senior research analyst at IBISWorld in Santa Monica, California.

Fallout from record defaults and foreclosures are also likely to sway many younger buyers from making such a big commitment in the near term, he said.

“People in my generation, people 20 to 30 years old, saw the downside risk associated with housing, so I think there’s going to be a bit weaker demand over the next few years,” said Andrews.

Refinancing, likewise, is unlikely to approach the levels seen last year when mortgage rates were near current levels.

Borrowers who could qualify for refinancing have in most cases already refinanced, most analysts agree.

Obvious that the end of the $8,000 first time home buyer credit caused a spike that has been more than reversed, much like November.

The question is how much that pull back, along with the euro and China issues, will slow what has been a moderately growing US economy.

With demand leakages like pension fund contributions and income compounding in pension funds and other corporate reserves, aggregate demand can only be sustained by the private sector or the public sector spending more than its income.

And right now the drivers of private sector debt- housing and cars- don’t show signs of the increases necessary to close our output gap.

That leaves the public sector.

For the current size of govt, we remain grossly over taxed by a govt that thinks its run out of money and is now dependent on the confidence of investors to fund itself.

Note, for example, the expired unemployment benefits mean a reduction in aggregate demand which in fact works against employment.

And this is with a Democratic majority.

As long as the ‘deadly innocent fraud’ that to be able to spend dollars the US Govt needs to tax or borrow is taken as a given, it seems unlikely that pro growth policy will be implemented and unlikely growth will be sufficient to materially close the output gap any time soon.

Looks like a better functioning refi market with new construction and prices remaining relatively low as the tax credit ends.

No sign of credit growth coming from this sector any time soon.

US Home Refinancing Jumps While Purchasing Slumps

By Julie Haviv

May 26 (Reuters) — U.S. mortgage applications to refinance home loans jumped to a seven-month high last week as rates neared record lows, but purchase demand remained stuck at a 13-year low.

Interest rates on 30-year fixed-rate mortgages, the most widely used loan, reached their lowest level since late-November 2009, the Mortgage Bankers Association said on Wednesday.

Low mortgage rates may prove to be the saving grace for the housing market as it copes with the expiration of popular home buyer tax credits.

The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended May 21, increased 11.3 percent.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 4.4 percent.

“Refinance application volume jumped last week as continuing financial market turmoil related to the budget crises in Europe extended the opportunity for homeowners to lock in at historically low mortgage rates,” Michael Fratantoni, MBA’s Vice President of Research and Economics, said in a statement.

yes, thanks!

On Thu, Apr 29, 2010 at 7:46 AM, wrote:

—–Original Message—–

Great chart on US housing…got this earlier in the week but
the world been moving far too quickly since…shows the
momentum in the LoanPermance Index vs CaseSchiller house
prices…chart speaks for itself as to the risks?

Karim writes:

>   
>   (email exchange)
>   
>   On Mon, Mar 1, 2010 at 3:40 PM, wrote:
>   
>   Hi Warren,
>   
>   I believe this is along the lines of your idea a while back to mitigate the
>   foreclosure problem by having the US Gov’t step in and take ownership of the
>   real property and rent the home to the current homeowners. I was sifting
>   through this Goldman piece about GSE reform and it looks like Fannie may be
>   already doing this in a program called ‘deed-for-lease.’ Were you aware of
>   this?
>   

The largest landlord in the nation? How the GSEs deal with loans headed for foreclosure is critical. According to the recent announcement, these loans will be held in their retained portfolios. However, moving this many loans into the portfolio—worth at least US$300bn—would threaten to violate the caps put in place by the Treasury (see Box). One way out of this situation would be to take ownership of the collateral, thereby converting loans, which count against the cap, into real property, which does not. With close to 2 million current and expected delinquent loans this year, how the GSEs dispose of this property will become an important issue. The GSEs will be under political pressure to hold property off the market, and may be inclined to do so in any case if they see property values bottoming. This could mean renting the properties: in November 2009, Fannie Mae announced a ‘deed-for-lease’ program, which allows homeowners to relinquish ownership of the property and rent it instead. In January, Fannie Mae took another step in this direction with the announcement of a policy to allow tenants in Fannie-Mae foreclosed property to rent the property on a month-to-month basis after foreclosure.

Yes, heard they were trying it late in the game, without many takers, but good that they at least did some, thanks!

Prof James Galbraith had presented the idea a year or more ago to a congressional committee. Don’t know if that was the source or not. Never did get any feedback.

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Looks like nothing is trickling down, at least yet, even with 5.7% real growth. Still going the other way, in fact, for the lowest income groups.

On Wed, Feb 3, 2010 at 9:38 PM, Russell Huntley wrote:

From Jon Prior at HousingWire:

Mortgage Delinquencies Pass 10%: LPS

Home-loan delinquency rates in the US reached 10% in December, up from the record-high 9.97% in November, according to Lender Processing Services … which provides data on mortgage performance.

Accounting for foreclosures in the pipeline, the total non-current rate stands at 13.3% …. When extrapolated for the entire mortgage industry, 7.2m mortgage loans are behind on their payments.

More foreclosures and short sales coming!

Note: the MBA reported the delinquency rate in Q3 was 9.64%; the MBA Q4 delinquency data will be released soon.

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Agreed. And as I’ve been saying since day one. The transmission mechanism he references isn’t broken. It never existed.

The reason banks are ‘hoarding cash’ is that the Fed has exchanged reserve balances for securities it bought in the market place.

The Fed determines reserves/’hoarding’ and not the banks.

From Dave Rosenberg: Look at the charts below and you will see how little effect the policy stimulus is exerting leaving the government continuing with demand-growth policies, such as extended and expanded housing tax credits, and the Fed, Treasury and the FHA doing all it can to keep the credit taps open … and for marginal borrowers at that. So the charts below show what, exactly? That the transmission mechanism from monetary policy to the financial system and the broad economy is still broken fully 2½ years after the first Fed rate cut. Cash on bank balance sheets as a share of total assets is at a three-decade high.

Bank lending to households and businesses has contracted more than 7% from a year ago, an unheard-of rate of decline unless you want to go back to Japan in the 90s or the U.S.A. in the 30s.

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>   
>   (email exchange)
>   
>   On Tue, Dec 29, 2009 at 8:55 AM, wrote:
>   
>   Do you agree with their conclusion that monetary policy (low rates) didn’t affect housing
>   prices?

Yes, seems that way to me, too.

>   
>   I guess they did raise rates from 2003-06.
>   
>   Seems the very low short rates DID contribute to the ability to buy “more house” or qualify for
>   any house.
>   

Maybe some.

>   
>   For me it was the bush 2003 fiscal adjustment- spending increases, retro tax cuts, etc. that got
>   the deficit up to 200 billion by q303 which was about 8% of gdp annual. Then after a few years
>   the sub prime housing fraud started with loan officers on commission pushing fraudulent
>   appraisals and fraudulent income statements that turned the recovery into a mini boom that
>   actually didn’t get all that large before it crashed when the $trillion fraud was discovered.
>   

Fed: “Monetary Policy and the Housing Bubble”

Excerpt:
“Lessons
Our findings are both clear and limited in scope.

We find little evidence that the setting of U.S. monetary policy could have directly accounted for a substantial share of the strength in U.S. housing markets between 2003 and 2006. In particular, the rise in house prices or housing activity during this period was much faster than the pace consistent with the overall macroeconomic environment at that time.

But we also find that housing-specific developments were unusual in this period—and not only with respect to prices and activity. The form of mortgage finance—the prevalence and nature of mortgages with adjustable rates versus fixed rates, the role of other “new” or exotic mortgage features, and the role of different types of lenders and securitization paths—all shifted during this period. These shifts undoubtedly fed on each other, with strong demand for housing and rising house prices spurring unsustainable evolution in the nature and perceived risks associated with mortgage innovations and vice versa. This finding is quite limited in that it describes developments but does not explain why such developments occurred.

Nonetheless, our clear finding that traditional channels of monetary policy accounted for little of the rise in housing markets and that housing-specific factors involved the interaction of shifts in demand and mortgage finance suggest two important lessons for policy and certainly for subsequent research. In particular, our discussion connects to the questions of whether monetary policy should “lean against the wind” in the face of asset price bubbles and of how complimentary financial policies (for example, macroprudential regulation) may interact with monetary policy.”

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Karim writes:

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Link:

Seven Deadly Frauds of Economic Policy (June 17, PDF Link)

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That nagging feeling that 0 rates are deflationary keeps lingering.

The following FNMA news might be even more deflationary than the Dubai news over time. I wonder if Congress was involved in this decision, as FNMA is a public/private partnership:

Fannie Mae to Tighten Lending Standards: Report

Oct. 25 (Reuters) —Fannie Mae plans to raise minimum credit score requirements next month and limit the amount of overall debt that borrowers can carry relative to their incomes, The Washington Post reported on Thursday.

Starting December 12, the automated system that the government-controlled mortgage finance company uses to approve loans will reject borrowers who have at least a 20 percent down payment but whose credit scores fall below 620 out of 850, the newspaper reported. Previously, the cut-off was 580.

Also, for borrowers with a 20 percent down payment, no more than 45 percent of their gross monthly income can go toward paying debts, the newspaper said.

A Fannie Mae spokesman told the newspaper that the limits reflect the company’s recent experience.

Loans to people with credit scores below 620 fell seriously behind at a rate approximately nine times higher than other loans purchased in the same period, Fannie Mae spokesman Brian Faith said. Loans taken out by borrowers with lots of debt also suffer higher levels of serious delinquency, he said.

“It’s not enough to help borrowers buy a home — we must also ensure that they can stay in the home over the long term,” Faith said in a statement to The Washington Post.

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Not looking good. Looks like something bad did happen back in July.

The combo of modestly rising GDP, with rising unemployment due to productivity is very unattractive politically.

Deficit myths keep them doing anything substantive.

Still wouldn’t surprise me if they announce something dramatic, like they are going to pay for healthcare by cutting back in Afghanistan and elsewhere, which, program merits aside, will not be supportive to demand.

And if gold turns south (no sign of that reversal yet)/dollar spikes whatever optimism is left vanishes with the realization that all the Fed’s horses and men are irrelevant regarding deflation.

Karim writes:

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Wonderful, we contrive policy to drive up unemployment and foreclose vast numbers of people out of their homes at firesale prices so others can move in with subsidized down payments to buy them.

The lower prices could be a sign of bid hitting rather than offer lifting.

U.S. Economy: Existing Home Sales Jump 10% as Prices Decline

By Shobhana Chandra

Nov. 23 (Bloomberg) — Sales of existing U.S. homes jumped 10 percent in October to the highest level since February 2007 as Americans rushed to take advantage of a tax credit, cheaper properties and lower mortgage rates.

Purchases rose more than forecast to a 6.1 million annual rate from a 5.54 million pace in September, the National Association of Realtors said today in Washington. The median sales price decreased 7.1 percent from October 2008.

Stocks extended gains on signs the industry at the center of the deepest recession since the 1930s may contribute to a recovery. The extension of a tax credit originally due to expire Nov. 30 and its expansion beyond first-time buyers may fuel further gains in home sales, helping to overcome the drag from rising foreclosures and unemployment.

Existing home sales were forecast to rise to a 5.7 million annual rate, according to the median estimate of 66 economists in a Bloomberg News survey. Estimates ranged from 5.2 million to 6 million, after an initially reported 5.57 million rate in September.

Condos, Co-ops

Sales of existing single-family homes rose 9.7 percent, the biggest gain since 1983, to an annual rate of 5.33 million. Sales of condos and co-ops increased 13.2 percent to a 770,000 rate.

The share of homes sold as foreclosures or otherwise distressed properties rose to 30 percent from 29 percent in September, NAR chief economist Lawrence Yun said in a press conference today.

A “similarly robust” sales gain may occur this month, he said. “With such a sales spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer,” Yun said.

The number of previously owned unsold homes on the market fell 3.7 percent to 3.57 million. At the current sales pace, it would take 7 months to sell those houses, compared with 8 months at the end of the prior month. The months’ supply is the lowest since February 2007.

New-Home Sales

Sales of previously owned homes, which make up more than 90 percent of the market, are compiled from contract closings and may reflect purchases agreed upon weeks or months earlier. Many economists consider new-home sales, recorded when a contract is signed, a more timely barometer.

The Commerce Department may report on Nov. 25 that new home sales rebounded to a 405,000 annual rate in October, according to the Bloomberg survey.

Home construction seized up last month as builders waited to find out if the first-time homebuyer tax credit would end, a Commerce Department report showed last week. Builders in October broke ground on the fewest houses since April’s record low annual pace.

Sales and construction may get another boost after President Barack Obama on Nov. 6 extended the incentive until April 30. Earlier, buyers had to close the transaction by Nov. 30 to be eligible. The government also expanded the program to include some current owners.

Debt Purchases

Mortgage rates held down by Federal Reserve purchases of housing debt are also spurring a recovery in the housing market. The average rate on a 30-year fixed mortgage fell last week to 4.83 percent, the lowest since May, according to Freddie Mac.

Borrowing costs may remain low as the Fed has signaled it will keep the benchmark interest rate near zero for an “extended period.”

“Activity in the housing sector has increased over recent months,” Fed policy makers said in their Nov. 4 statement. “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”

The labor market remains a risk for housing. The unemployment rate, which rose to a 26-year high of 10.2 percent last month, will stay above 10 percent through the first half of 2010, a Bloomberg survey showed.

Foreclosure Filings

Foreclosure filings surpassed 300,000 for an eighth straight month in October as rising joblessness made it tougher for homeowners to pay bills, according to RealtyTrac Inc. data.

Some companies see a potential for stronger demand. Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, has signed contracts or options to buy 4,000 land lots in preparation for a market recovery, said Chief Executive Officer Ara K. Hovnanian. The Red Bank, New Jersey-based builder had reduced its land holdings during the recession.

“Prices are ridiculously low in some markets,” he said at a conference in New York on Nov. 17. “That’s not going to stay.”

Sales of existing homes were led by a 14.4 percent jump in the Midwest, today’s report showed. Purchases rose 12.7 percent in the South, 11.6 percent in the Northeast and 1.6 percent in the West.

Sales had reached a 4.49 million pace in January, their lowest level since comparable records began in 1999.

Purchases of existing homes rose 23.5 percent in October compared with a year earlier. The median price fell 7.1 percent from a year earlier, to $173,100.

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Karim writes:

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