Real Estate Outlook: Federal Reserve Weighs In

The U.S. Congress asked Federal Reserve Board chairman Ben Bernanke a key question last week: Where do you and your colleagues believe we're headed in terms of the national economy?

Bernanke's reply: There are bumps and potholes on the road to recovery, but the Fed "expects continued moderate (economic) growth, a gradual decline in the unemployment rate (to about 7 percent) and subdued inflation" over the next couple of years.

No sooner had Bernanke delivered his testimony than some of those "bumps" in the road popped up: The Commerce Department reported new housing starts dropped by 5 percent in the latest month, and the National Association of Realtors reported existing home sales down by a similar percentage.

But keep in mind the central point Bernanke was making in his forecast: Troubled though it may look with any single statistical report, the fact is the national economy continues to grow - by about two and a half percent on an annual basis - and many elements of the economy are better off this year than the were the year before.

Take the Commerce Department's housing starts number: That five percent decline was mainly the result of a big drop in starts of new rental apartment units - not a drop in starts of new single family houses, which were stable.

In fact, the Commerce Department survey found that permits pulled by builders for future construction on single family homes were actually up in three out four of the major regions of the country.

Analyzing the government's data, Bernard Markstein, senior economist for the National Association of Home Builders, was encouraged - and predicted increases in both starts and sales over the coming several months.

The latest sales report for existing homes from the National Association of Realtors also had some bright spots: Sales in June were 10 percent higher than they were in the same month the year before.

Even median prices of all homes sold were up slightly, and that's despite the fact that one third of sales were "distressed" in some way - REOs, foreclosures or short sales.

And remember: virtually all economists - including those at the Fed - had forecast lower home sales for the months immediately following the expiration of the tax credit programs.

Meanwhile, hints of a rebound in future sales emerged in the latest report on new mortgage applications to buy homes.

The Mortgage Bankers Association found that purchase applications overall jumped by 3.4 percent - and by 8 percent for FHA loans to buy houses. Those transactions won't go to closing for two to three months … but they're a sign of where we're likely headed.

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