Update on the Economy              August 22, 2001

Update on the Economy                                  October 23, 2001

Housing Sales and Prices Lag

By Edmund A. Mennis,  Consulting Economist                       

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Although housing starts increased in September, sales, selling prices and inventories reflected a weakening housing market as the economy slipped into recession. Data in prior months had suggested a decline was likely, but the September 11 terrorist attack made it certain, increasing both the expected severity and the length. The Federal Reserve and Congress have moved promptly to adopt monetary and fiscal policies to mitigate the effects, but it will take time before those moves take hold.

This downturn is not an ordinary recession. It is difficult to evaluate the psychological damage done to both consumer and business confidence. While the country at the moment is united behind the government’s actions to combat terrorism, this support may begin to dissipate as the military effort drags into the winter and the inconveniences and costs of tightened security become more burdensome. In addition, a rash of unexpected costs associated with the terrorist attacks have intensified a dismal profits picture, which will cause further production cutbacks, layoffs, and profits erosion.

We do not expect the outlook to improve rapidly or soon. However, housing has been a bright spot in the economy and historically has exhibited resiliency in recessions, usually turning up before the economy has bottomed out. Consequently, although housing, too, has been affected adversely, this sector probably will not be hit as hard as other areas.

September Housing Activity

Although September housing starts increased by 1.7 percent, the gains were concentrated in the South and West. It should be no surprise that the sales activity was curtailed after September 11, as Americans remained glued to their Televisions and radios to follow the latest developments. New home sales fell 1.4 percent to a level 13.7 percent below the peak sales rate in December 2000 and existing home sales fell 11.7 percent from their record peak reached in August. (See Chart 1.)



Housing prices also weakened in September. Median (midpoint) sales prices for new homes, which have been falling steadily, were 9.6 percent below their June peak of $162,400, in September. The median price for existing homes fell 3.7 percent to $148,200 from the record peak in August. (See Chart 2.)
 

The inventory of unsold homes has been climbing for several months. (See Chart 3.) In September, the inventory of new homes available for sale rose to 4.4, the highest since August 2000, while the existing home inventory increased to 5.4 months, its highest level since August 1998.




Providing a notable bright spot in the housing picture, mortgage rates continue to fall. For the week of October 19, 30-year fixed mortgage rates were 6.1 percent, more than 2.5 percentage points below the May 2000 peak of 8.64 percent. Rates will fall further as the Fed continues to ease and as economic activity slows further. As a result, refinancing is at record levels. The softness in home sales activity may reflect increased consumer caution induced by the terrorist attacks. As the economy resumes its more regular pace, the affordability of homes should spur sales activity again. We may have a dry spell for a few months, but the outlook appears more promising as we move into 2002.

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Edmund A. Mennis is an economic and investment management consultant and author based in Palos Verdes Estates, CA.  His prior experience includes positions as head of trust investment operations for two major U.S. banks and director of investment research, economist and member of the investment committee of a major mutual fund. Former editor (now editor emeritus) of Business Economics, the professional journal of the National Association for Business Economics, he has written more than 60 books, book chapters, and monographs, and articles,  including How the Economy Works, published by Prentice Hall, and now in its second edition.  Dr. Mennis holds a Ph.D. in economics and finance from New York University Graduate School of Business Administration.  He also is a Chartered Financial Analyst and a past president and trustee of the Institute of Chartered Financial Analysts.

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