A housing recovery is the one thin reed that US economic bulls have been trying to hang their hat on but that reed thinned further today as new home sales declined sharply.
New home sales account for only a small fraction of the US real estate market (roughly 10% of US home sales are new versus 90% existing homes being resold), but when sales of new homes fall, the economic ripples are greater due to falling demand for construction workers, building materials, etc…
While one-month’s data won’t have any impact on the Fed’s thinking, the relative weakness of the real estate market versus historic norms will. With quantitative ease proving to be a tough sell on Main Street as well as on Capitol Hill, it would not be a surprise to see the Fed try and concoct some sort or targeted program to ease mortgage lending.
In the immediate aftermath of the financial crisis in 2008/2009, the Fed came up with effective, innovative programs to revive specific markets (TALF, etc). Maybe they should go back to the old playbook and try a program targeted toward housing. The unintended consequences of QE (higher commodity prices, asset bubbles elsewhere) might be more contained under such a scenario.
