Fed Finds Distinct Slowdown In Housing

The U.S. economy continued to grow in the early fall despite a "widespread cooling" in the once-hot housing market, the Federal Reserve reported Thursday.

The Fed's latest survey of business conditions around the country found the economy expanding with growth being described as "moderate or mixed."

However, the report found there was a distinct slowdown in housing, with the majority of the Fed's 12 regions reporting lower asking prices for homes, a softening in sales and rising inventories of unsold homes.

The Fed said that reports from around the country "indicated widespread cooling" in housing markets, with financial institutions finding that mortgage lending activity had tapered off. That decline in lending was being offset to some extent by an increase in lending for commercial projects in several districts, the Fed said.

The latest snapshot of the economy, based on reports from the Fed's regional banks, will be used when central bankers next meet on Oct. 24-25 to consider what to do with interest rates.

It is widely expected that the Fed will for a third straight meeting leave rates unchanged, preferring to wait and see if the economic slowdown brought on by previous rate hikes will be enough to keep inflation under control.

Minutes released on Wednesday of the Fed's deliberations in September found that Fed officials remained concerned about inflation. Those worries were seen as a signal that the Fed will not soon start cutting interest rates, something that financial markets had grown hopeful might occur given the spreading economic slowdown.

Last week, Federal Reserve Chairman Ben Bernanke said that housing was going through a "substantial correction" that he estimated would trim economic growth by a full percentage point in the second half of the year.

The economy grew by just 2.6 percent in the second quarter, less than half the pace of the first three months of the year, as it was battered by soaring gasoline prices, rising interest rates and the cooling housing market.

The current state of the housing market is reflected in an AP-AOL Real Estate poll, which reveals that 80 percent of Americans believe it is difficult for most first-time buyers to afford a home, and 59 percent believe the situation is worse now than five years ago.

Mike Pietrafesa, 35, of Nassau County, N.Y., recalls that he had trouble finding a home he could afford. That was eight years ago. The split-level house on Long Island is a little small, he says, but he is staying put.

"There are lots and lots of houses for sale that seem as though they are priced ridiculously and they aren't selling," said Pietrafesa. "I certainly think that the old standard of having 20 percent of your house value as a down payment is really out of the window these days. I definitely think it is harder, in that respect, for first-time buyers."

By region, 68 percent of those in the West and 63 percent of those in the Northeast say it is more difficult for first-time buyers to afford a home than it was five years ago. Fifty-four percent took this view in the South, and 51 percent felt this way in the Midwest.

The Census Bureau reported recently that a third of U.S. homeowners with mortgages spent 30 percent or more of their household income last year on housing costs. These costs, which include mortgage payments, taxes, insurance and utilities, are usually considered excessive if they top 30 percent of household income.

Galloping housing prices during the five-year housing boom is a big factor in this, economists say. Rising mortgage rates and incomes, which for many people had failed to keep up with inflation, are other factors, economists said.

Nationwide, median home values jumped 32 percent from 2000 to 2005, to $167,500, the Census Bureau reported.

Even though home prices have cooled this year, some people think they are still too high.

"A lot of home prices are out of this world," says Patricia Cheatham, 59, who lives between Southern Pines and Lakeview in North Carolina. If something happened to her mobile home, she says she would not be able to afford to buy again. "I'd probably have to find a low-income rental place," she says.

The poll found that 46 percent of those surveyed thought the housing market in their area is overpriced. Nearly the same amount — 45 percent — believed their market was priced about right. Only 5 percent though their market was underpriced, with the remaining few having no opinion.

Looking out over the next two years, 49 percent of people surveyed predicted that housing prices in their area will go up, while 18 percent thought they would go down. Thirty-two percent believed prices would stay the same. The rest did not voice an opinion.

Mark Zandi, chief economist at Moody's Economy.com, says that the future direction of home prices probably will depend on where you live.

A study by his company predicted that slumping prices will be concentrated in the states of California and Florida and the Northeast corridor from southern Maine to just south of Washington, D.C., as well as some parts of Nevada and Arizona. In some markets, prices may not bottom out until 2009, the report says.

"But households sitting in Dallas or Charlotte, N.C., may wonder what all this panic talk is in the housing market," says Zandi. Those are among the markets that he believes will see price gains over the next two years.

The AP-AOL Real Estate poll of 2,001 adults, including 289 recent homebuyers and 401 likely future homebuyers, was conducted by telephone Sept. 19-26 by Ipsos. The poll had a margin of error of plus or minus 2 percentage points for all adults, 6 percentage points for recent homebuyers and 5 percentage points for likely future homebuyers.