Housing, Fed Report Show "Moderate" Recovery

Housing starts plunged more than expected and the

said that the economic recovery is "likely to be moderate for a time."

New home sales were expected to decline, but they collapsed to a 300,000 annually adjusted rate in May.  That was a drop of one third, and it took new home sales to the lowest level since the government started collecting data on new home sales in 1963.  The decline took new home sales to a level that was 18 percent below last May's figure.

A housing and interest rate analyst for Weiss Research said that

  He added that they expected "some kind of hangover impact, but this is like what you would have on New Year's Day."  And an economist at Irvine warned that the slide in home sales "is happening while

have fallen to historical lows.  If there was ever a time to buy a home, you know now is the time."

Some analysts said that the numbers are evidence that the

has been boosted by government programs and without that support, it's weak.  The chief economic strategist for Miller Tabak said without government support, sales of homes "are likely to be somewhat muted."  And the co-director of the Center for Economic and Policy Research said that "we are likely to see renewed decline in prices."

Even the most optimistic of forecasters only predict slight increases in housing prices. 

  The most optimistic forecast is by

Securities, where a 2.5 percent increase is expected.  And these are the housing market bulls!

The bears are predicting that housing prices will fall this year.  Those on the negative side of things include such luminaries as

, a Nobel prize winner, and Meredith Whitney, who correctly called the implosion of the subprime market and its effect on banks.  Stiglitz said that "even a three to four percent increase in value won't help people who have seen their homes decline 20, or 30 or 50 percent."  And an

professor at MIT said the housing sector won't pull up the economy as it has in past

"until prices rise."

The news today wasn't all bad.  The Federal Reserve, as expected, kept interest rates at their record lows.  That means that they don't see

as a problem.  "

."

A former Fed governor who is now a senior economic adviser for the Potomac Research Group said "a rise in interest rates is even further off than we may have thought.  It's unlikely they will move before the latter half of next year."

The economy, according to the Fed, continues, but it's a tame recovery.  The

is "improving gradually."  That is a change from April's assesment of a labor market that's "beginning to improve."  Still, high levels of unemployment and tight credit have combined to keep consumer spending "constrained."

The Fed's statement is designed to show that "they're comfortable the recovery is under way, while still admitting to the fact the recovery faces headwinds," according to a senior vice president at Nationwide Mutual Insurance.  "They want to make sure they don't sound Pollyannaish."

And that's a good attitude for investors.  Don't be Pollyannaish.  The data on housing was horrible, and it's another data point that shows while the recovery is underway, it's not going to be a strong one.  Invest accordingly.

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