The Federal Reserve recently released the latest incarnation of its Beige Book, offering evaluations of the current economic conditions and how they will affect individual sector growth as the new year finds its rhythm.
For the housing finance market, the report offered only cautious optimism, as labor shortages within most of the Fed's surveyed regions are continuing to stymie growth in the ever-important construction and manufacturing realms. The ability of those sectors to sustain themselves remains vital to the Fed's spending policies going forward, and therefore to the housing market's continued revitalization as a whole. More specifically, the tepid returns don't lend themselves to much promise regarding the central bank's plans for continuing to reduce its rate of quantitative easing when it meets to discuss fiscal policy at the end of January.
According to Beige Book data, "moderate" economic growth was reported in nine of the Federal Reserve's 12 districts, while two offered "modest" improvements and one - the Kansas City region - said that conditions "held steady" during December. In Fed report terms, modest growth indicates expansion slightly more significant than moderate growth, according to the Wall Street Journal.
Decisions to be made
The latest Beige Book - the first of eight separate reports to be released throughout the year - will likely influence Fed policy meetings scheduled for Jan. 28-29. Those meetings will certainly feature discussions regarding the bond-buying program, which was finally tapered from $85 billion per month to $75 billion per month beginning in January. That decision, however, was predicated largely on the fact that the November jobs report offered extremely positive returns, with more than 200,000 positions being added to the economy. December's employment situation summary was decidedly less promising, revealing that employers added only 74,000 jobs, with the construction and manufacturing sectors showing less expansion than those associated with the housing market might have hoped. How that slowed rate of progress affects the central bank's stimulus plans remains to be seen, but another drastic reduction seems unlikely.
Beige Book returns indicated that, while sales numbers and home values continued to experience modest gains typical of the homebuying offseason, new inventory remains vital to the market's potential for sustainable, long-term growth.
"Real estate markets generally continued to improve, according to District reports," read a portion of the Beige Book summary. "Although a few Districts indicated home sales or residential construction in some areas had slowed or declined in recent months, most cited increased residential sales activity and construction as well as rising home prices."
Particularly in major metropolitan areas - which are the focus of the Fed's districts and the sources of the study's findings - inventory shortages have been the primary culprit for the eye-opening, sometimes alarming rates of property value appreciation seen throughout 2013. Places like the Bay Area, Boston, Los Angeles, New York and San Diego have seen steady jumps in year-over-year prices, in some cases to the point that fears of another housing bubble have been stoked. With other corners of the local economies lagging behind price gains, new construction is essential to helping supply levels more closely reflect demand, therefore moderating prices and fostering more healthy growth.
Homebuyers in the aforementioned markets and elsewhere have already begun to step away from the market, and with the Fed's reduced rate of bond buying threatening to prompt a jump in mortgage interest rates, prices need to cool before prospective shoppers feel good about their chances again.
"Most Districts reported increases in home sales in the closing months of 2013 compared with last year, but the Atlanta, Cleveland, and Kansas City Districts indicated that year-over-year residential sales growth had slowed relative to earlier quarters in 2013," the Beige Book summary stated. "The Boston, Philadelphia, Minneapolis, and Dallas reports noted that at least some areas within those Districts saw home sales below year-earlier levels. Home selling prices continued their upward trend in the Boston, Atlanta, Chicago, Minneapolis, Kansas City, and San Francisco Districts, while remaining stable in the Cleveland and Richmond Districts; New York noted mixed changes in sale prices across the District."
A silver lining may be found in the fact that December employment figures were affected by extreme weather conditions throughout the Northeast and Midwest, which caused work stoppages for many within the construction sector in particular. Still, most of the Fed's districts revealed a continued need for new permits and new projects that would help revitalize local markets heading into the spring buying season.
"Notwithstanding its decrease in overall residential construction, the Dallas District noted elevated construction levels for the multi-family units," said the Fed summary. "The Atlanta, Cleveland, and Chicago Districts also cited strong multifamily construction. Reporting Districts indicated that residential real estate contracts remained optimistic going forward, while voicing concerns about declining inventory and potential changes in the mortgage market. The Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts reported that contacts expected residential construction to pick up in the near term."