From Bloomberg, U.S. Economy: New home sales drop as end of tax credit looms:
Sales of new U.S. homes unexpectedly fell in September as the end of a tax credit for first-time homebuyers approached, highlighting the importance of government aid to the emerging economic recovery.
Purchases dropped 3.6 percent to a 402,000 annual pace that was lower than the most pessimistic economist’s, according to Commerce Department figures issued today in Washington. Other data showed orders fo climbed 1 percent in September, the fourth gain in the last six months.
The drop in sales “does raise some questions about where the housing market is going to be in six months, arguably without any more support,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “Whatever you think about the economy, it’s not going to be a straight line” toward recovery.
Are people still calling a bottom to this market? This is a sneak peek of what is going to happen once the government removes props from housing. Housing sales are still down year over year, and we're supposed to be in recovery mode. The ultimate driver of housing will be jobs, which we're still shedding, and lower housing prices, which the government won't allow to happen.
Tax Credits + MBS Purchases
Fed policy makers are obviously pushing on a string here when it comes to housing. Low interest rates are immaterial when banks refuse to refinance and people are unemployed. It won't be pretty for housing when there are no more buyers of mortgage-related debt, and foreclosures and distressed sales really start to hit the market.
“Much of the strength in the economy is due to temporary factors such as fiscal stimulus initiatives like the home- buyers credit,” said Dana Saporta, an economist at Stone & McCarthy Research in Skillman, New Jersey.
Fed policy makers meeting next week are likely to repeat their commitment to keeping interest rates low for an “extended period.” The Fed last month decided to slow purchases of $1.25 trillion in mortgage-backed securities while extending the end-date of the program by three months, to March 31.
This post has been republished from Moses Kim's blog, Expected Returns.