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With all the dismissal
reports about the home real estate market, don’t lose
track of something critically important: Mortgage
interest rates have been falling quietly but steadily
for weeks, and are now at their lowest level in half a
year, barely a percentage point above 40-year lows.
New mortgage
applications are up sharply, the number of pending home
sales is up, the national economy continues to expand
moderately, and the rate of unemployment just declined
again – to 4.6 percent.
All of which begs the
question: Just what kind of housing bust is this anyway?
With gloom-and-doom purveyors forecasting imminent
crashes in dozens of metropolitan areas, how could such
key fundamentals as jobs, interest rates and even
pending home sales simultaneously be trending in the
opposite direction?
Donald L. Kohn, the
Federal Reserves vice chairman, took a stab at that
seeming conundrum in a speech Oct. 4 at New York
University. His views are worth keeping in mind if you
want to put the negative news on home process and sales
in perspective.
To begin with the
fundamental point: Kohn sees no imminent bust or crash
in housing at all. It is a “correction” that’s under
way – a cyclical rebalancing of a marketplace that got
too hot for too long in some parts of the country, and
is now heading back toward more “normal” conditions,
where prices are more in line with what consumers can
afford.
“The reported declines
in house prices in a number of areas should help to
facilitate the rebalancing of supply and demand in those
markets,” said Kohn. Not all home sellers have fully
grasped the altered realities in their own local markets
– that they’ve got to reduce their asking prices if they
truly want to sell – so the process is still unfolding.
Re-priced houses, in turn, should stimulate greater
numbers of potential buyers to get off the sidelines and
make offers. The unexpected 4.3 percent increase in the
latest monthly number of pending home sales contracts
heading for closing nationwide reported Oct. 2 by the
National Association of Realtors could be a sign that
Kohn’s prediction is already taking shape.
Second, said Kohn, the
housing correction – expressed through new home starts –
“may be closer to (its) trough that to (its) peak.”
Translating from Fed-speak, this means that we appear to
be well on our way toward bottoming out and eventually
returning to positive growth in new home starts and
resale’s.
Now to interest rates.
Today’s “unusually low” long-term mortgage rate
environment “stands in sharp contrast to some past
downturns in the housing market that followed actions by
the Federal Reserve to tighten credit conditions
significantly.”
Translation: Affordable
mortgage money should help shorten the current housing
cycle compared with credit-squeezed periods in the
1980’s, when mortgage rates sometimes exceeded 16
percent for fixed-rate loans.
A final key factor,
according to Kohn: “Continuing growth in real incomes
should underpin the demand for housing, and, as home
prices stop rising, help erode affordability
constraints.”
Add it all up: Lower
asking and selling prices on houses are integral parts
of the self-correction and should help shorten the whole
process. Lower interest rates should make those lower
prices affordable to a border number of potential
buyers. That could become an even more important factor
if mortgage rates dip below 6 percent in the coming
months, as some Wall Street capital market analysts
expect.
James Glassman, a
managing director at JP Morgan Chase, says 30-year.
Fixed rate mortgages at 5 ¾ percent are a distinct
possibility if long-term rates in the global bond market
continue to ease. The current cyclical downturn in
housing “is not your classic interest rate story” he
says. Money is available at low cost, and there’s a
good possibility “it won’t be long before we work
through this.”
The source of some of
the confusion about just where housing is headed, and
how bad things are likely going to get? Mike Moran,
chief economist of Wall Street’s Daiwa Securities
America, minces no words: The financial press and TV
news shows are overly dramatizing what is a normal and
long-predicted cyclical rebalancing.
Housing “is going
through a correction that’s badly needed, “he said.
“The key issue is whether it is orderly or disorderly” –
and all signs point to a continued orderly process, not
a breakout bust or panic.
Doug Duncan, chief
economist of the Mortgage Bankers Association, points
out that national housing sales numbers are merely
rolling back to 2003 levels – “and that was a record
year.” Serious sellers and buyers shouldn’t be misled
by predictions of imminent crashes, said Duncan. Not
only do the doom reports ignore the positives out there
in the marketplace – mortgage rates in particular – but
“the rhetoric is just way overwrought.” |
