Fed rate cut no quick cure for housing mess

John W. Schoen Senior producer • Profile • E-mail

This week’s half-point cut in interest rates by the Federal Reserve accomplished several important objectives, reassuring jittery financial markets by cutting the cost of money while demonstrating its determination to head off an economic downturn. But the move will have little short-term impact on the worst housing market in 16 years, which is at the root of the problem.

That was made clear in the latest report on the ailing industry, just a day after the rate cut, showing a sharp drop in housing starts last month to the slowest pace in 12 years.  

"Housing starts have come down, at least in part, as a reaction by the home building industry to too much (unsold) inventory,” said Jerry Howard, CEO of the National Association of Home Builders.

Individual home builders say it’s too soon to know when conditions will begin to pick up again. On Tuesday, the NAHB reported that its index of builder confidence fell in September to the lowest level on record.

And while the Fed’s rate cuts may have provided a psychological boost to the markets, many analysts and builders think it will take more cuts — and more time — before the housing market recovers.

“Does anybody want to call this as a bottom because of the Fed cut?” said Robert Toll, CEO of home builder Toll Bros. at an investor conference Tuesday. “I don’t think you can call it yet.”

Some Wall Street investors seem to think the industry may have hit bottom; shares of many home builders surged Wednesday on news they have scaled back on new construction. The building slowdown in August is seen as a sign that a bulge in inventories of unsold homes may begin to shrink.

To cope with the inventory, builders have been slashing prices with some success. Hovnanian Enterprises, a builder with operations in 19 states, staged a nationwide sale last weekend, cutting prices by as much as 25 percent and offering some six-figure savings. The company said it sold 2,100 homes in one day — nearly as many as it sold in the three months ended July 31.

CEO Ara Hovnanian said Wednesday the company was "very thrilled" with the results and said the sale demonstrated that there are still plenty of buyers. But while he praised the Fed for providing an important psychological boost to consumers, Hovnanian says the housing market hasn’t bottomed yet.

“I expect housing starts to continue to come down in the coming months regardless of this rate cut," hee said. “There's a lot of momentum right now to slow the housing market down.”

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