New-home sales dived to a record low in January but stocks rallied as Federal Reserve chief Ben Bernanke eased concerns that the central bank will take the economy off life support too soon.
Bernanke spoke to a House panel as the Commerce Department reported new-home sales sank 11.2% to an annualized 309,000, the lowest since records began in 1963. Analysts expected a small gain to 354,000. That stepped up fears that the housing and broader economic revival could stall as the government and Fed end support.
The central bank last week unnerved investors by raising its largely symbolic discount rate on loans to banks. But Bernanke stressed an ultra-low benchmark fed funds rate is still needed to aid a “nascent” recovery.
The Nasdaq and S&P 500 rose 1% while the Dow gained 0.9%.
“He relieved a little apprehension that the punch bowl is going to leave the party ,” said James Grefenstette, a senior portfolio manager at Federated Investors.
The Fed has kept the fed funds rate at a record low near 0% and is purchasing over $1 trillion in mortgage securities to bolster housing. But it plans to end those buys in March and has started to wind down other lending programs.
Analysts worry withdrawing stimulus too soon could send the economy back into recession.
The economy rose at a 4% annualized pace in the second half of 2009, but Bernanke noted that was due to inventories stabilizing, allowing factories to boost output.
“A sustained recovery will depend on continued growth in private-sector final demand for goods and services” as the inventory boost wanes and government support for the economy diminishes later this year, he said.
Consumer and business spending and manufacturing have risen, but uncertainty about jobs and housing has clouded the outlook .
Consumer confidence sank in February to a 10-month low on job worries, the Conference Board said Tuesday, a bad sign for consumer demand. The current conditions index hit a 27-year low.
Bernanke noted some “tentative” signs of stabilization in the labor market, including fewer layoffs and stronger demand for temporary staff, which usually foreshadows a pickup in hiring.
But, he said, “the job market remains quite weak, with the unemployment rate near 10% and job openings scarce.”
The Senate OK’d a $15 billion jobs bill Wednesday. The House has passed a bigger and far different version. Economists doubt the package will have much impact.
Meanwhile, the median new-home price fell 5.6% vs. December to $203,500, a six-year low. It would take 9.1 months to sell off the inventory of new homes at the current sales rate, an eight-month high and well above normal.
“You can usually find one good piece of news in a report but I can’t find any,” said John Canally, an economist at LPL Financial.
Loan demand for buying a home sank last week to the lowest since May 1997, the Mortgage Bankers Association said Wednesday.
But luxury homebuilder Toll Bros. (NYSE:TOL – News) said Wednesday its Q1 loss narrowed and that new orders almost doubled. Commercial Loan Workout
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