- The Washington Times - Saturday, August 22, 2009

A surprising surge in home sales and an upbeat speech from Federal Reserve Chairman Ben S. Bernanke gave Wall Street a shot of optimism Friday that sent stocks soaring.

Sales of existing homes jumped in July for the fourth month in a row, signaling that the battered housing market may finally be on the mend.

Existing-home sales soared 7.2 percent in July, the National Association of Realtors reported Friday. It was the biggest monthly percentage gain since the group began compiling comparable records in 1999.

As markets digested the housing news, Mr. Bernanke delivered the keynote speech at the Fed’s annual August retreat in Jackson Hole, Wyo.

“After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Mr. Bernanke said.

The resulting rally on Wall Street sent major indexes to new highs for the year.

The Dow Jones Industrial Average shot up 155 points, closing above 9,500 for the first time since Nov. 4. All the big indexes finished with gains of more than 1.5 percent. Meanwhile, Treasury prices tumbled, pushing yields sharply higher, as investors no longer felt they needed the safety of government debt.

But the Fed chairman warned that “critical challenges remain,” including persistent strains in financial markets around the world, “significant financial losses” confronting financial institutions and the “considerable difficulty” that many businesses and households face in gaining access to credit.

As a result, the recovery from the longest, deepest downturn in 70 years “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Mr. Bernanke’s speech recapped how the U.S. economy plunged into a deep recession and what steps the central bank and the Bush and Obama administrations took to avert a full-fledged depression.

The chairman said the flow of credit nearly stopped when the financial markets took a steep fall in September and October. Swift government intervention was needed to save mortgage giants Fannie Mae and Freddie Mac and prop up insurance giant American International Group.

But the Fed could not save Wall Street titan Lehman Brothers, which had inadequate collateral to secure a Federal Reserve loan large enough to save it, Mr. Bernanke said. Lehman’s September bankruptcy roiled financial markets worldwide.

After Lehman’s collapse, Mr. Bernanke said, he realized that the Fed’s tools were insufficient. “Substantial fiscal resources were necessary,” said the Fed chairman, who provided “strong support” for the 2008 creation of the $700 billion bank-bailout fund known as the Troubled Asset Relief Program.

The Federal Reserve helped with unprecedented emergency-lending programs and drastically cut short-term interest rates.

“Without these speedy and forceful actions, last October’s panic would likely have continued to intensify, more major firms would have failed and the entire global financial system would have been at serious risk,” said Mr. Bernanke.

“As severe as the economic impact has been, however, the outcome could have been decidedly worse,” he said. “[T]he resulting global downturn could have been extraordinarily deep and protracted.”

If the U.S. economy is not yet clearly out of the woods, neither is the housing market.

First-time homebuyers, for example, accounted for 30 percent of sales last month.

“The question mark is how much the first-time homebuyers tax credit is goosing the numbers,” said Patrick Newport, U.S. economist for IHS Global Insight.

This credit of up to $8,000 expires Nov. 30. “Sales will take a hit once the credit expires,” Mr. Newport said.

Homes have become more affordable as their prices have plunged. The national median price for existing homes in July was $178,400 - $31,700, or 15.1 percent, less than the July 2008 median home price of $210,100.

The NAR said that distressed properties, especially foreclosures, continued to weigh down median prices. In July, distressed properties accounted for 31 percent of total sales, about the same as June.

Existing-home sales last month jumped 13.4 percent in the Northeast, 10.9 percent in the Midwest and 7.1 percent in the South.

Home sales declined 1.7 percent in the West, where the regional unemployment rate reached 10.5 percent in July, according to a Labor Department report released Friday. The jobless rate for California and Oregon hit 11.9 percent last month, while Nevada’s jumped to 12.5 percent.

With more Americans projected to lose their jobs in the future, economists expect foreclosures to continue to rise.

“As a sign that mortgage performance is once again driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts,” Jay Brinkmann, chief economist for the Mortgage Bankers Association, said Thursday.

Rising foreclosures will place more downward pressure on housing prices, making homes more affordable for working families. At the same time, falling prices will place other households “underwater,” meaning they will owe more on their mortgages than their homes are worth. In a vicious cycle, that would lead to more foreclosures and still-lower prices, analysts fear.

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