Fed Beige Book – Focus on Real Estate

From the Federal Reserve:

Beige Book – Summary

Real Estate and Construction
Nearly all Districts reported a continued softening in housing markets. High inventories of new homes have generally led to a slowing in residential building, with some exceptions. While single-family construction weakened, New York saw multifamily permits on pace with a year earlier. In Cleveland, some builders reported a stabilizing market. Although Atlanta reported steep declines in Florida home building, activity was mixed in the rest of the District. Chicago saw smaller declines in construction than in the preceding period, with signs of recovery in the Chicago metro area. Minneapolis reported increased remodeling activity in several markets.

All Districts reported slow home sales, except for Richmond, which saw a modest increase. Decreases in home prices were reported by Boston, New York, Atlanta and Chicago, while Kansas City said prices were subdued. In contrast, Dallas reported modest price increases and San Francisco said homes were appreciating but at a slower pace. New York reported that Manhattan’s co-op and condo market improved in the fourth quarter of 2006, with flat prices but higher sales volume. Dallas noted that the low-priced home market was slower than higher-priced segments. Realtors in San Francisco were offering significant incentives to sell properties. New York reported rent increases, while Dallas noted that apartment vacancies edged up in the cities of Dallas and Houston, largely due to an exodus of Hurricane Katrina evacuees.

Second District–New York

The Second District’s economy has continued to expand at a moderate pace since the last report, though recent performance has been mixed across sectors. There are some indications of a pickup in cost pressures but no discernible acceleration in consumer prices. Retailers generally indicate that holiday season sales were on or slightly above plan, with much of the strength coming in the second half of the month; retail prices were again reported to be little changed, with promotional discounts roughly the same as a year ago. Tourism activity has strengthened further since the last report. Two regional consumer surveys showed confidence retreating slightly in December, but remaining at fairly high levels.

Manufacturers have grown less positive in their assessment of current business conditions in early January, though they remain optimistic about the near-term outlook, and contacts note some intensifying in price pressures. Housing markets remain mixed: New York City’s rental market has shown continued strength, and Manhattan’s co-op and condo market picked up in the fourth quarter, with sales rising and inventory retreating from very high levels. However, the market for single-family homes in both northern New Jersey and upstate New York remains sluggish. New York City’s office market grew increasingly tight at year end with vacancies falling and rents climbing rapidly. Finally, bankers report further weakening in loan demand in the household sector, especially for home mortgages; they also indicate a moderate increase in consumer delinquency rates.

New York City’s office market tightened further in the final months of 2006, while housing markets and residential construction activity were mixed. Lower Manhattan’s office vacancy rate fell by more than a full point to 7.1 percent from November to December, while Midtown’s rate edged down to 5.6 percent; both are at their lowest levels in more than five years. Moreover, rents have continued to climb rapidly since the last report, reaching new record levels; the average asking rent for Class A office space across Manhattan is reported to have risen 2.5 percent in December alone, and ended 2006 up 35 percent from a year earlier. A contact at a leading Manhattan commercial real estate firm notes that there is relatively little new office space currently under construction.

Single family construction activity in New York and New Jersey, as measured by housing permits, continued to weaken in November, slipping by roughly 30 percent from a year earlier, but multi-family permits were roughly on par with a year earlier. More recently, New Jersey homebuilders report that the market stabilized somewhat in December but remains weak. Discretionary sellers in the resale market are reported to be withdrawing from the market, which has reduced the inventory of existing homes on the market, but has also reduced the pool of new home buyers. Builders indicate that they have substantially cut back plans for new development in New Jersey (especially in active-adult communities) and this is seen as slowing construction activity in 2007. New York State Realtors report that both sales and prices for single-family homes were running lower than a year earlier in the fourth quarter. However, Manhattan’s co-op and condo market showed resilience in the fourth quarter; though prices were little changed, sales activity picked up noticeably, after a sluggish third quarter, and the number of listings (inventory), though still quite high, declined. Manhattan’s apartment rental market has continued to strengthen since the last report; a contact at a major real estate firm characterizes conditions as extremely tight at year end. Compared with a year ago, rents are up an estimated 5 percent, with larger increases on smaller, entry-level units in recent months. While the rental supply is constrained by a limited number of new rental buildings under development, a significant proportion of new condos are being bought by investors, who have then leased them.

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7 Responses to Fed Beige Book – Focus on Real Estate

  1. dreamtheaterr says:

    NEW YORK (Dow Jones) — The Federal Reserve shouldn’t try to prick an asset bubble, but should be prepared for possible sharp reversals in prices of homes or other assets to ensure they do not do serious harm to the economy, said Fed governor Frederic Mishkin on Wednesday.

    “Because subsequent collapses of…asset prices might be highly damaging to the economy, as they were in Japan in the 1990s, should the monetary authority try to prick, or at least slow the growth of, developing bubbles? I view the answer as no,” Mishkin said in remarks prepared for delivery to the Forecaster’s Club.

    But Mishkin added: “I do think that central banks can ensure that sharp movements in the prices of homes or other assets do not have serious negative consequences for the economy.”

    Mishkin, a professor of banking and finance at Columbia University before he joined the Fed last September, conducted a study of the actions and statements of the Swedish Central Bank, the Sveriges Riksbank, from 1995 until 2005.

    He said the Riksbank tried to “lean against the wind” by raising rates last February to retrain home prices.

    But Mishkin said this focus on asset prices confused the public about the objectives of the Swedish central bank.

    “I heard over and over again in interviews with participants from different sectors of Swedish society that the statements about home prices by the Riksbank confused the public about what it was trying to achieve,” Mishkin said.

    But Mishkin said he was not saying that a central bank “should stand by idly” while asset prices climb steeply.

    He said a central bank can explore different scenarios to assess how it should respond to an asset price collapse.

    “This is something we do at the Federal Reserve,” he said.

    “A central bank can minimize financial instability by being ready to react quickly to an asset price collapse if it occurs,” Mishkin said.

    Mishkin was talking hypothetically about asset bubbles. While he said there has been an extraordinary run-up in U.S. home prices over the past decade, he added it was “extremely hard to say whether they are above their fundamental value.”

    Notice the last paragraph. Is it really rocket science to figure out that house prices are above their fundamental value?

  2. njrebear says:

    New Fed fear: Lower oil

    http://money.cnn.com/2007/01/17/news/economy/inflation_oil/index.htm?postversion=2007011715

    Falling oil prices may not curb inflation but could spur growth, taking Fed rate cuts off the table.

  3. sg says:

    jb. is it possible to change background color. I am reading blog using Palm Treo, and the page comes with black background.

  4. Better lower your prices fast or else your home equity (if u have any now) will just go POOOOOOOFFF says:

    Good afternoon crabby bunch.

    BOOOOOOOOOOOOOOOYAAAAAAAAAA

    Bob

  5. BC Bob says:

    “Discretionary sellers in the resale market are reported to be withdrawing from the market, which has reduced the inventory of existing homes on the market, but has also reduced the pool of new home buyers.”

    The chain is only as strong as the weakest link. Sellers are withdrawing because they can’t sell. Too many weak links in the chain. Look at the #’s of cancellations, last quarter running at approx 30-40%. Why?? They can’t sell. The chain is fractured fron top to bottom. Do you have to sell to buy??? Better start lowering prices, if not, you become part of the stats.

  6. Chip says:

    From the link above: “There are three reasons for the drop in oil prices and all are likely temporary,” he said. “Certainly the warmer weather is a contributing factor. The Saudi comments that there’s no reason for OPEC to have an emergency session to cut production is another. There could be geopolitical reasons for that. And there are large inventories right now.”

    “There ‘COULD’ be geopolitical reasons” — Not true. There ARE geopolitical reasons, huge ones, that cause Saudi Arabia to play the cards it holds and pump enough oil to force prices down. It all has to do with the power play of and against Iran. SA has the swing capacity, even when Nigeria is broken, to control the total flow of oil, simply because virtually every other significant partner, including Iran, cheats when quotas are levied. To me, this is far and away the biggest reason prices will stay low for a while — the weather is a straw man.

  7. chicagofinance says:

    Chip – dead-on I agree!

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