by Calculated Risk on 1/27/2010 11:25:00 AM

As I mentioned in the New Home sales post this morning, the FOMC statement today will probably be changed to reflect the renewed weakness in the housing market. This includes the decline in new home sales, housing starts, and other indicators including mortgage applications and builder confidence.

The first two sentences in the last FOMC statement are no longer operative.

From the FOMC December 16, 2009 statement:

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months.

Most indicators suggest economic activity has picked up, but the labor market and the housing sector have shown renewed signs of deterioration.

I expect the main statement points will remain the same: the target range for the federal funds rate will remain at 0 to 1/4 percent, expectations are for the MBS purchase plan to be completed by the end of the first quarter of 2010, and the "exceptionally low levels of the federal funds rate for an extended period" phrase will be included.

Here is more on the "distressing gap" between existing and new home sales.

The following graph shows the ratio of existing home sales divided by new home sales through November.

Click on graph for larger image in new window.

This ratio is just off from the all time high last month when existing home sales were artificially boosted by the first time home buyer tax credit.

The ratio of existing to new home sales increased at first because of the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

The recent increase in the ratio was partially due to the timing of the first time home buyer tax credit (before the extension) - and partially because the tax credit spurred existing home sales more than new home sales.

On timing issues: New home sales are counted when the contract is signed, and usually before construction begins. So to close before the original Dec 1st deadline, the contract had to be signed early this Summer. Existing home sales are counted when escrow closes. And the recent surge in existing home sales was primarily due to buyers rushing to beat the tax credit.

The second graph shows the same information with existing home sales (left axis), and new home sales (right axis). This is updated through the December data released this morning.

Although distressed sales will stay elevated for some time, I expect this gap to eventually close - probably from an eventual increase in new home sales and a decrease in existing home sales. This just shows the housing market is far from healthy.