Housing’s Influence Gets a Test
By CONDRAD DE AENLLE
Published: September 24, 2006
THE Federal Reserve has held interest rates steady again, while reiterating its belief that inflation pressures persist in the economy. This week, a couple of reports may confirm that the housing market is no longer a source of those pressures.
Sales of existing homes are predicted in a Bloomberg News poll of economists to show a decline on Monday, to an annual rate of 6.20 million units in August from 6.33 million in July. Two days later, a decline is also anticipated for sales of new homes, to an annual rate of 1.04 million units in August from 1.072 million.
Bill Cheney, chief economist at John Hancock Financial Services, called the housing market “the big wild card now” in the economy. The report on Monday is the one he will follow most closely this week.
“Existing-home sales is probably the biggest single thing in terms of new news and calibrating the seriousness of the weakness in the housing market,” he said.
Speaking of calibration, Mr. Cheney lauds the Fed for keeping the various influences on economic growth and prices in balance. He says he thinks that the central bank is finished with this credit tightening cycle and has managed to avert a recession.
“My gut feeling on the state of the economy is that the Fed has got things just about right,” he said. “We’re going to have a weak third quarter, but we’ll be coming through that with decent growth for the fourth quarter and into 2007.”
By his reckoning, the housing market does not have as many excesses to work off from the boom times, as others believe. Much of the equity taken out in mortgage refinancing was used for sensible purposes, he said, like paying off credit cards and buying cars at cheaper interest rates than would have been available otherwise.
He cautioned, though, that if the fall in home sales accelerates, all bets on real estate and the economy are off.
“The first thing you tend to see if the housing market is going south is a contraction of activity as sellers refuse to sell,” Mr. Cheney explained.
He emphasized that he does not expect a big drop in existing-home sales and that he believes “the housing market is going to hang in there.” Yet he warned that “a huge drop in transactions would hurt the economy and would be evidence that the market is weaker than I’ve been imagining.”
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