Your Economy (No Politics)

[Bullwinkle]

Existing-Home Sales Drop as For-Sale Inventory Rises
By VIKAS BAJAJ
December 30, 2005


Existing-home sales dropped to their lowest level in eight months in November and the total number of homes for sale rose, an industry group reported yesterday, suggesting that the housing market was continuing to slow.

Sales fell 1.7 percent last month, to an annual pace of 6.97 million, after dropping 2.7 percent in October, the National Association of Realtors said. The number of homes on the market rose 1.2 percent, to 2.9 million, enough to keep the market supplied for five months at the current pace of sales. Home inventory is up 14.3 percent from a year ago.

Rising mortgage rates appear to be weighing on the nation's long housing boom, but the impact seems to be limited, given that sales and prices remain near record highs. The median price - half the homes sold for more and half for less - was up 13.2 percent, to $215,000, from a year ago.

"We have every reason to believe that we are very close to the end" of the peak, said Anthony Chan, an economist at J. P. Morgan Asset Management.

Even a moderate slowdown will be felt outside the housing sector, economists say, because access to cheaper mortgages has bolstered consumer spending on goods like furniture and electronics. As interest rates rise - making it more costly to borrow - and home prices increase less rapidly, retail stores and other businesses will feel the slowdown.

Refinancings and home equity loans have "literally turned your house into an A.T.M. in the last couple of years," said Carl Steidtmann, chief economist at Deloitte Research. "That will virtually go away."

He predicted the growth in gross domestic product would slow to 3 percent next year from his estimate of 4 percent this year.

Earlier this week, the bond market began reflecting the fears of slower growth when the yield on the 10-year Treasury note, 4.36 percent yesterday, fell below the yield on a two-year note, 4.368 percent.

The phenomenon is referred to as the inverted yield curve, because a graph of long-term and short-term yields typically form an "open jaw" with the long end forming the top of the mouth. When that curve inverts, it is an indication that investors are not as confident about the near-term prospects of the economy. A bond's yield moves in the opposite direction of its price.

So far the divergence between the long- and short-term bonds is small, economists note, and historically recessions do not set in for up to a year after the curve first inverts. Also, the Federal Reserve, even after raising interest rates 13 times in a row, has kept short-term borrowing costs low by historical standards, providing plenty of fuel for the economy.

"You have fairly robust economic growth," Mr. Chan said, "you have a mild tightening cycle and you have an economy that is still not showing signs that it's about to slip under."

Higher short-term rates and lower long-term rates will have an impact on the housing market, keeping homes affordable for buyers who take out 15- and 30-year fixed mortgages but raising borrowing costs for buyers who use adjustable-rate mortgages that start off with a low interest rate for the first few years and balloon later.

Short-term rates "drive the adjustable-rate mortgage business, which is what a lot of marginal buyers use," Mr. Steidtmann said. "Fifteen- and 30-year loans have really not changed all that much."

The average introductory rate on a one-year adjustable-rate mortgage rate has climbed to 5.22 percent, up from 4.1 percent in January, according to Freddie Mac. In the same period, the 30-year fixed mortgage rate has risen to 6.26 percent, from 5.77 percent.

Mortgage applications for home purchases were down an average of 2.3 percent in the last four weeks, according to the Mortgage Bankers Association. Applications for refinancing were down an average of 3.8 percent.

In a separate report, the Labor Department said the number of unemployment claims rose by 3,000, to 322,000 last week, indicating a steady labor market. Compared with this time a year ago, new and existing claims for unemployment insurance were both down.

http://www.nytimes.com/2005/12/30/business/30homes.html