Housing Recovery in Only Two Areas, Says Federal Reserve Report

Only two regions of the country showed any sign of a real estate recovery in July and August -- Cleveland and St. Louis. Otherwise, activity in residential real estate markets declined further, according to the Federal Reserve's Beige Book released Sept. 8. In most areas of the country, inventories of available homes rose, but the Atlanta region actually saw a drop in inventories because of the slow pace of new construction.

The Beige Book is prepared eight times a year by the Federal Reserve Banks for the Federal Open Market Committee (FOMC) meeting. Using the information from the Beige Book and other staff reports, the FOMC decides what it will do with interest rates. After seeing the Beige Book that was prepared Aug. 8 for its Aug. 10, the FOMC decided to keep its target for the federal funds rate at 0.0 to 0.25 and said that it anticipates that "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

In other words, don't expect to see interest rates rise any time soon.
So let's take a closer look at the reports about real estate conditions that helped to fuel this decision to maintain a near 0.0 interest rate for the foreseeable future.

Home Sales

Most districts reported very low or declining home sales, which was blamed primarily on the expiration of the homebuyer tax credit at the end of June. But in some districts, low-end sales were impacted, and in other districts, the high end of the market showed more weakness. For example New York and Dallas said the expiration of the tax credit resulted in weak conditions for lower-priced homes. But Philadelphia and Kansas City thought the high end of the market was weaker, now that the tax credit no longer is available.


Only Cleveland, St. Louis and Minneapolis saw residential construction increase, while all other areas of the country saw residential construction decline.

Housing Prices

There was some good news for real estate prices: Most districts reported that prices were stable. A few areas -- Boston, Minneapolis, and San Francisco -- saw price increases. Only Richmond reported that recent home sales were "dominated by foreclosure and short sales," but Chicago reported an increase in the supply of foreclosed homes for sale.

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Commercial, industrial and retail space remained depressed in most of the country. Vacancy rates remained at elevated levels and is starting to place substantial downward pressure on rents in some areas of the country. In fact parts of New York and Kansas City reported declining rents. "High vacancies and negative absorption held nonresidential construction activity to the bare minimum in most districts," the report concluded.

Cleveland was a bright spot, reporting new construction for industrial use and educational infrastructure. 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.


Lending activity remained stable but showed some sign of weakening. 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 declines that were driven by weak business.

Consumer lending continues to be sluggish, with Philadelphia and Richmond emphasizing that households' continue to focus on reducing their debt burdens. The only area where lending increased was refinancing activity for residential mortgages in the New York, Cleveland, Chicago and Kansas City Districts. But new-purchase mortgage originations remained quite sluggish nationwide.


In order for there to a major turnaround for real estate, job growth is critical. In that area there was very little good news. Hiring of permanent employees is not happening as employers generally rely on temporary and contract workers throughout the country.

Some areas are seeing change. Boston is starting to see conversions from temporary to permanent workers because of skill mismatches between available jobs and the workers applying for them. Chicago and Kansas City also reported a similar phenomenon. But most districts reported an ample supply of qualified applicants for open positions. That means the traditional driver of people seeking homes -- moving to another city to find a job -- still won't be a major helper for improving the real estate market.

Expect to see the same distressing news for the real estate market well into 2011. Jobs are still the key and they are just not there yet.

Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies" and "The Complete Idiot's Guide to the Federal Reserve."

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