Did Anybody Actually Read Bernanke’s Speech?

The big event for today turned out to be a speech given by Fed Chairman Ben Bernanke to the International Monetary Congress in Cape Town, South Africa via satellite before the market open this morning.

This speech somehow reaffirmed the market’s belief that a rate cut is unlikely in 2007 and even raised the possibility of a rate increase. 

10 year Treasury yields added 6 basis points to 4.99%. 

Reacting to the rise in interest rates, the stock market tanked with the Dow down 81 points and the S&P 8.

On the surface, I suppose this makes some kind of sense as Bernanke gave the usual gloss:

…. the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected.  Thus far, however, we have not seen major spillovers from housing onto other sectors of the economy.  On average, over coming quarters, we expect the economy to advance at a moderate pace, close to or slightly below the economy’s trend rate of expansion.

But if you read what he actually said, and the facts he cited, about the housing and subprime mess it paints a different picture:

Homebuilders have responded to weak sales by curtailing construction.  Single family housing starts have declined by a third since early 2006, sufficient to subtract about 1 percentage point from real GDP growth over the past four quarters.  Despite the drop in homebuilding, the inventory of unsold new homes has risen to more than seven months of sales, a level well above the average observed over the past decade.  Accordingly, residential construction will likely remain subdued for a time, until further progress can be made in working down the backlog of unsold new homes.

On the subprime mortgage mess:

…. the rate of serious delinquencies for subprime mortgages with adjustable interest rates – corresponding to mortgages in the foreclosure process or with payments ninety or more days overdue – has risen to about 12 percent, roughly double the recent low seen in mid-2005.

We are likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable rate loans face interest rate resets.

On what this means for home demand and consequently home prices, the principal source of wealth for most Americans:

Tighter lending standards in the subprime mortgage industry – together with the possibility that the well publicized problems in this market may dissuade potentially eligible borrowers from applying – will serve to restrain housing demand…..

It’s happening all around us. 

DataQuick recently reported that April 2007 total home sales (including existing and new homes and condos) in the Sacramento area (including outlying counties Amador, Nevada, Sutter, Yolo and Yuba – which are, however, small markets and don’t drive the overall numbers) were at their worst level for the month since 1995.

RealyTrac reported that (subscription required) 1Q 2007 foreclosure proceedings in Sacramento, Placer and El Dorado counties are more than triple what they were in the first quarter of 2006.

DataQuick’s data for April 2007 show that new home sales in Sacramento, Placer and El Dorado counties were down 26% from last April on huge price decreases: 22.3% in Sacramento county and 7.5% in Placer.

Bernanke reassuringly concludes:

We will follow developments in the subprime market closely.  However, fundamental factors – including solid growth in incomes and relatively low mortgage rates – should ultimately support demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.

He must have read The Secret.  I can just see him sitting cross legged on the floor of his office in the Federal Reserve Building repeating to himself: Ask, Believe, Receive; Ask, Believe, Receive.  We’ll see if it works.