Why is Fed Chairman Bernanke so unsure of the economy while forecasters are expecting 4% to 5% growth in the current quarter after the economy broke in to expansion last Summer? Well, while some unexpected movement in inventories, retail trade and the trade deficit have boosted Q4 growth estimates the lack of economic momentum is creating the forward uncertainty.
Today's housing starts release are a good example. The 9% November gain reported followed a larger -10% decline in October to leave the level below the June to September period. Housing starts haven't yet found adequate demand despite the 31% gain (or 101,000) in new home sales since the January low.
Moreover, the monthly pace is swinging off government incentives as the cold winter weather spills in to the Northern areas and generally shuts down activity until Spring. The extension of the first time homebuyer tax credit through the end of April 2010 keeps the new prospects looking while the Fed ends the long term Treasury buying (intended to keep long term mortgage rates low) in March. It should be up to the Spring sales season to carry the housing market through most of 2010.
Adding to the problem is a continued rise in available housing supply even without new building. The continued fall in home prices pulls home equity values lower and below the outstanding mortgage principal for many homeowners. A tremendous 23% (10.7 mln) of outstanding mortgages had negative equity in the third quarter (mortgage principal larger than home value), arguing for a continued rise in foreclosures and price declines which leave marginal buyers on the sidelines, waiting.