NAR chief economist Lawrence Yun blames banks for “holding onto huge cash reserves” as the primary reason for the latest plunge in housing. He also cites the weather, oil prices, a temporary soft patch, and everything but motherhood and apple pie.

Please consider April Pending Home Sales Drop After Two Monthly Gains.

Pending home sales fell in April with regional variations following increases in February and March, with unusual weather and economic softness adding to ongoing problems that are hobbling a recovery, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, dropped 11.6 percent to 81.9 in April from a downwardly revised 92.6 in March. The index is 26.5 percent below a cyclical peak of 111.5 in April 2010 when buyers were rushing to beat the contract deadline for the home buyer tax credit.

The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, said the dip in contracts may be due to temporary factors. “The pullback in contract signings is disappointing and implies a slower than expected market recovery in upcoming months,” he said. “The economy hit a soft patch in April from sharply rising oil prices, widespread severe weather with the heaviest precipitation in 20 years, and a sudden rise in unemployment claims.”

Yun notes the growth in retail sales slowed measurably in April, while sales at furniture and home furnishing stores declined sharply. “Nonetheless, the magnitude of the fall in pending home sales is larger than can be implied by broad economic factors, so we need to see if it’s just a one-month aberration.”

Yun said tight credit is the primary long-term factor holding back the market. “No doubt the continuing excessively tight mortgage underwriting process is making the housing market recovery unnecessarily slow,” he said. “Lenders and bank regulators need to be mindful of the historically low default rates among mortgage borrowers of the past two years. A robust economic and housing market recovery cannot occur as long as banks continue to hold onto huge cash reserves.”

Excess Reserve Nonsense

Banks lend when they think they have a good credit risk provided they are not capital impaired or concerned about capital impairment. That provision is critical.

Banks do not lend from reserves or even need reserves to lend. Loans come first, reserves second.

Please see Fictional Reserve Lending for a detailed discussion. Note: I wrote that piece in December 2009 so the charts are old. However, the concept about reserves and lending still applies.

Capital Impairment the Critical Problem

That banks are not lending is a sign of at least one of the following problems, and likely all three.

  • Capital impairment
  • Lack of good credit risks
  • Lack of consumer demand

In spite of what the Fed or the FDIC may want you to believe, many banks are capital impaired. They hold massive amounts of garbage on their balance sheets (especially real estate and commercial real estate), at marked-to-fantasy prices, not marked-to-market prices.

The excess reserves Yun cites are a mirage.

Mike “Mish” Shedlock
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