A Simple Explanation of the Last Federal Reserve Statement

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The Federal Open Market Committee voted last week to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

In its press release, the FOMC noted that the U.S. economy "has continued to pick up", that the jobs markets is getting better, and that housing market has shown "some signs of improvement" lately.

It's the fourth straight statement in which the Fed speaks optimistically about the U.S. economy -- a signal that the worst of the recession is likely behind us. Which doesn't mean that things are better, just that they are getting better.

Just as there was speculation about the end of the last "boom" before the impact of that end was felt, there is always a lot of conversation about recovery before its impact is completely felt. People who are struggling now may be feeling some relief, but they may continue to struggle for a while longer - though they can do so feeling that things are getting better, and should continue to do so.

The economy isn't without threats, however, and the Fed identified several, including:

1. Tight credit conditions for consumers


2. Businesses are reluctant to hire new workers


3. Lower overall housing wealth

The impact of each is obvious. Without more liquid credit, larger purchases like homes, cars, and business equipment may be stalled (or at least slowed) even though the demand or need for those purchases is growing. Until more people are employed, many families will be more conservative in their spending, delaying some of the benefits of the recovery. And finally, with less equity in their homes, people have a harder time releasing that equity for education, purchases, or opening new businesses. At least in our market area, since our price adjustments have been very moderate in comparison to the national averages, people have not lost as much housing wealth as in other parts of the country.

The message's overall tone remained positive, however and inflation appears to be held in check.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent "for an extended period" and to honor its $1.25 trillion commitment to the mortgage bond market. That plan -- due to expire at the end of March 2010 -- should be noted by today's homebuyers. Fed insiders estimate that the program suppressed rates by 1 percent through 2009.

Mortgage market reaction to the Fed press release is negative. Mortgage rates aincreased after the annoucnement.

The FOMC's next scheduled meeting is January 26-27, 2010.

Could the Philadelphia Real Estate Market be Recovering?

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As long as I have been in the real estate business, I have been told that real estate is an economic leader. We are first in and we are first out. A cliche that has been true in every recession I have experienced.

You'll remember that residential real estate was the first part of the economy to feel the changes from the boom to our current economic readjustment. Economic indicators were pointing to issues in the market just before we began experiencing the effects of those issues. The good news (for those of us who own homes or invest in real estate) is that we seem to be seeing some signs indicating that may be the next step in the process.

In a recent article in Realty Times, Kenneth R. Harney pointed out the following positive economic indicators;

Pending home sales took a 3.2 percent jump last month -- the second straight month of positive growth. These are signed home sale contracts that haven't yet gone to closing, but are scheduled to do so in the next 60 to 90 days.

Lawrence Yun, chief economist for the National Association of Realtors, said we're now at "the leading edge of first time buyers responding to very favorable affordability conditions, and an $8,000 tax credit."

Mortgage applications for future home purchases also surged again, up five percent nationwide last month, according to the Mortgage Bankers Association. Rates are firming up in response to the rising demand for mortgage money. They rose last week on average to 4.8 percent for 30 year fixed rate loans and 4.6 percent for 15 year mortgages.

In a market like Philadelphia, where our average prices have seen little readjustment from their historically affordable levels, these indicators may indeed herald the long awaited "bottom" of the residential real estate market. Fueled by basic human needs rather than rampant speculation, our market has remained stable, with only single digit price adjustments inthe past 2 years, and some makret areas actually seeing increases in price even in this environment.

So if you have been thinking of "making your move" in the real estate market, now may just be the moment you've been waiting for. As I have mentioned in earlier posts, buying real estate for a longer term financial benefit has always been a good thing to d, since time will ease any market adjustments in your favor. With these indicators, that logic is reinforced by the immediate benefots of the current market. So i f you have a reason to buy, and have been waiting for the right time, your wait may well be over.

Home Buyers are Coming Out !

A real estate trade group reported Tuesday that Pending Home Sales ticked higher in December 2008. A "pending home sale" is a home under contract to sell, but not yet closed.

The group positions Pending Home Sales report as a predictor of future activity, suggesting that home sales will spike 60 days hence.

This is good news for the economy.

However, despite the Pending Home Sales report's correlation to the actual number of homes sold in the future, that connection may not be the report's best use. This is because of what Pending Homes Sales doesn't measure.

Specifically not included in Pending Homes Sales are:

1. Sales of new construction homes
2. Sales of For Sale By Owner properties
3. 80 percent of non-surveyed MLS transactions

And, lastly, it should be noted that Pending Home Sales tracks contracts -- not closings -- and until a home is sold and closed, nothing has really happened in the economy. That's especially relevant in a market like this in which finding financing isn't always so easy.

Pending Home Sales still has its place, though, because it's a terrific look at the current buy-side demand for homes. Clearly, low mortgage rates and falling home prices are making an impact and this is why the December's Pending Home Sales report is so important. It's the third housing report this month that shows the demand for homes rising while the supply of homes falls.

The other two reports:

1. The number of "used" homes sold monthly is rising
2. The number of new homes being built are falling

This is good news for home sellers and for the economy. As the existing inventory shrinks the value of the remaining inventory stabilizes and then increases. nd in an area like Philadelphia, where the prices have not been dramatically reduced, the benefot is even greater. If housing is expected to lead the U.S. out of recession, the seeds for that recovery may have already been planted.

(Image courtesy: The Wall Street Journal)