A slightly bigger than forecast 5.7 percent rise in sales of new homes in September reported by the National Association of Realtors on Wednesday lends credibility to September’s jump in housing starts, but appears neutral for Federal Reserve monetary policy discussions.
The jump in new home sales seems to have largely justified the 11 percent jump in September housing starts, says Decision Economics senior economist Pierre Ellis. The inventory of houses for sale at the end of September rose just 1.4 percent, from the end of August and the months’ supply fell to 4.5 months from 4.7 months, he added.
Thus, the increased production of houses seems not to have involved any “over-exuberant optimism” – and the impact if demand were suddenly to evaporate would be contained, he said. “Healthy skepticism seems to prevail in builderland,” Ellis observes.
The home sales jump should leave doves on the Federal Reserve’s policy-making committee feeling justified in their QE3 push since the doves see the third phase of unconventional easing “as a measure to sustain and further strengthen housing demand,” Ellis said. But the sales increase gives Fed doves no new evidence with which to argue QE3 should be stepped up immediately, he said.
Ellis said “odds do favor” a continuation of Operation Twist, a monetary easing tool that involves the Federal Reserve selling instruments that will mature in three years or less and using the proceeds of those sales to buy longer maturities. That program is currently set to end in December.