| Key Indicator Summary - Looming Tax Credit Expiration Spurs Sales |
| Written by Jonathan Dienhart | |
| 10.22.2009 | |
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Existing home sales in September posted their largest monthly gain in over 14 years as consumers rushed to take advantage of the soon-to-expire federal homebuyer tax credit. There is now very little time left to take advantage of the credit which is set to expire in just a little more than a month. There is a substantial lobbying effort underway to have the tax credit extended into next year with several bills and proposals currently under consideration. However, the extension has come under even more scrutiny recently as reports of fraud related to the tax credit have emerged while many debate what its cost would have on the current budget deficit. The tax credit has been effective at propping up home sales and drawing potential homebuyers off the sidelines in recent months, and there is speculation abound as to how much the pace of sales could drop off once the program ends. Should sales slow substantially, as was the case with auto sales when the “Cash for Clunkers” program expired, it could cause new destabilization in the fragile U.S. housing market. The debate will likely become even more heated as a decision on the extension is expected in the coming weeks.
All of the major stock indices were considerably lower on Friday despite strong earnings reports from tech bellwethers Microsoft and Amazon along with the aforementioned positive housing figures. The broader S&P 500 index ended the session down 1.2%. Stocks were dragged down by weakness in commodities, materials, and transports on Friday, the drop catalyzed by less-than-enthusiastic remarks from major railroad executives over the expected pace of economic recovery.
The Economy
Leading economic indicators posted gains for the sixth straight month in September. The leading index is now at its highest levels since September 2007. The leading index recorded a reading of 103.5 in September which is a 1.0 point gain from August levels. This month's increase was driven by a jump in the index for consumer expectations, surging stock prices, and gains in manufacturers' orders for capital goods. The surge in leading economic indicators over the past six months suggests that economic conditions will continue to improve in the coming months.
Housing starts increased 0.5% to a seasonally-adjusted annual rate of 590,000 units in September while building permit activity fell 1.2% during that time. Housing starts were slightly higher than the revised August figure of 587,000 units. Single-family housing starts rose 3.9% while multi-family starts fell 15.2% from the previous month. Single-family building permits declined 3.0% from last month to a seasonally-adjusted rate of 450,000 units.
The NAHB Housing Market Index in October experienced its first monthly decline since June as the government's homebuyer tax credit nears expiration at the end of November. The index declined one point from the previous month to a reading of 18 in October. The housing market index was coming off its highest levels in September since May 2008. This was the largest monthly increase in sales since August 1995 and the biggest annual increase in sales activity since January 2005.
Housing Market
Falling mortgage rates and the government’s homebuyer tax credit continued to fuel home sales in September. The seasonally-adjusted annual sales rate of total existing homes jumped 9.4% from August levels to 5,570,000 units. This is the highest annualized sales of existing homes has been since July 2007. Existing home sales are up 9.2% from September of last year. However, median existing home prices continued to trend lower in September. The median sales price of an existing home declined to $174,900 from $177,300 in August. The median existing home price is 8.53% lower than the same time last year when the median price was $191,200. Median existing home prices have now declined for three straight months and are back to their lowest levels since May.
Existing home inventory levels posted its second consecutive month of declines in September. Inventory of existing homes fell 7.49 percent to a preliminary 3,630,000 units from an upwardly revised 3,924,000 units in August. The rush to buy a home before the expiration of the homebuyer tax credit at the end of November has helped reduce the inventory of existing homes on the market.
National average mortgage rates increased from the previous week to 5.00% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on October 22nd. This is the second straight week that mortgage rates have increased and the highest they have been since last month. In the week ending October 16th, the MBA’s seasonally-adjusted purchase index dropped 7.6% from the previous week and was down 3.87% compared to the same time last year. This is the second straight week that purchase applications have declined and the lowest the purchase index has been since the second week of August.
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