Beige Book: Housing Market Experiencing "Sustained Lull"

The Federal Reserve has released the Beige Book

The Beige Book is a compilation of anecdotal information and data on current economic conditions across the country. The findings are NOT THE VIEWS OF FEDERAL RESERVE OFFICIALS...instead, each Federal Reserve bank interviews key business contacts, economists, market experts, and other sources in their specific district. This report is published eight times a year.

They call it the Beige Book because its Beige.

This edition was prepared at the Federal Reserve Bank of San Francisco and is based on information collected on or before August 30, 2010.  Below is a summary of the findings and a few excerpts on bank lending and housing. I called attention to some of the more important observations.

Real Estate and Construction

Activity in residential real estate markets declined further.  Most District reports highlighted evidence of very low or declining home sales, which many attributed to a sustained lull following the expiration of the homebuyer tax credit at the end of June. Some Districts, such as New York and Dallas, noted that the expiration of the tax credit created especially weak conditions for lower-priced homes, while others, including Philadelphia and Kansas City, identified the high end of the market as the primary weak spot.

Residential construction activity declined in most areas in response to weak demand. Cleveland, St. Louis, and Minneapolis were the exceptions to this pattern of declining activity, with reports from their contacts indicating that residential construction activity improved of late. Inventories of available homes rose in general, although the availability of new homes in Atlanta was held down by the slow pace of new home construction.

Price movements were mixed, with most Districts reporting stability or declines of late; a few, notably Boston, Minneapolis, and San Francisco, noted that prices rose in some areas compared with the previous reporting period or last year. Richmond reported that recent home sales were “dominated by foreclosure and short sales,” and Chicago reported an increase in the supply of foreclosed homes for sale.

Demand for commercial, industrial, and retail space generally remained depressed. Vacancy rates stayed at elevated levels in general and rose further in a few Districts, placing substantial downward pressure on rents. Asking rents continued to decline in parts of the New York and Kansas City Districts. High vacancies and negative absorption held nonresidential construction activity to the bare minimum in most Districts. A few Districts reported exceptions to weak conditions. Cleveland noted improved construction activity for industrial use and educational infrastructure; this raised overall activity above year-earlier levels and prompted modest hiring by builders. Chicago reported an increase in inquiries for commercial redevelopment and rising construction activity for public projects, but Richmond reported that state and local governments cut back on construction projects.

Banking and Finance

Lending activity was stable to down slightly on net. Most Districts reported little or no change from existing low levels of commercial and industrial lending, as businesses remained quite cautious about expansion plans. Dallas and San Francisco reported that overall lending trailed off, with declines driven by weak business lending stemming in large part from uncertainty about future economic conditions. Consumer lending remained sluggish in general, with contacts in Philadelphia and Richmond emphasizing the role of households’ ongoing efforts to reduce their debt burdens.

A recent flurry of refinancing activity spurred increased demand for residential mortgages in the New York, Cleveland, Chicago, and Kansas City Districts, but new-purchase mortgage originations remained quite sluggish in general. A few Districts pointed to increases in nonbank financing activity, including rising availability of trade credit in Atlanta and further increases in venture capital funding in San Francisco.

Lending standards were largely unchanged. However, New York reported tighter standards in all lending categories, particularly for commercial mortgages, and Kansas City reported that a few banks tightened standards for commercial real estate loans. By contrast, reports from Chicago indicated that  credit availability and terms loosened for business and consumer loans. Credit quality also changed little on balance. Philadelphia, Chicago, and San Francisco noted modest improvements in overall credit quality, while New York reported rising delinquencies for all categories except consumer loans and Atlanta reported an increase in business and household bankruptcies.

Labor Market, Prices, Wages

Upward price pressures were very limited during the reporting period, with the exception of selected food commodities and industrial materials. Wage pressures remained modest overall. Of Districts commenting on wages, most identified little or no upward pressures or increases. Hiring of permanent employees was held down in part by employers’ reliance on temporary and contract workers, as reported by Philadelphia and Atlanta, although Boston noted that conversions from temporary to permanent staff picked up. Contacts in the Boston, Chicago, and Kansas City Districts noted skill mismatches between available jobs and the workers applying for them, which caused a slight uptick in wage pressures for selected jobs in a narrow set of industries. More generally, however, the reports suggested ample supply of qualified applicants for open positions.

Consumer Spending and Tourism

Reports on consumer spending were mixed but suggested a slight increase on balance. Most Districts reported that non-automotive retail sales rose compared with the previous reporting period or were above their levels from 12 months earlier. Several Districts noted an emphasis on necessities and lower-priced goods. A few reports indicated that inventories for various goods remained near desired levels despite slower sales in some cases, as retailers have been practicing very tight inventory management.  Reports from most Districts pointed to consistent gains in travel and tourist activity, with pickups evident in the business and leisure segments alike.  Atlanta noted reduced tourist activity in areas of the Gulf Coast affected by the oil spill but improvements over last year in unaffected areas.

Manufacturing
Manufacturing activity expanded further on balance, although the pace of growth appeared to be slower than earlier in the year. Most Districts reported further gains in production activity and sales across a broad spectrum of manufacturing industries.  Reports on capacity utilization were mixed. Manufacturers of high-tech products have been operating near maximum capacity of late, although this partly reflects a substantial decline in industrywide capacity over the past three years, as noted by Dallas.

Summary

Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods. Economic growth at a modest pace was the most common characterization of overall conditions, as provided by the five western Districts of St.Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

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Plain and Simple: get used to hearing the term "stagnation". There has been no change in our fundamental economic outlook, we still see no reason to be optimistic about a rapid recovery. Technical trading tactics will create volatility in market levels, but investors remain non-committal and fluctuations are expected to occur within a range. The overall outlook remains highly supportive of low mortgage rates.