Housing Slump

With all the dismal 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 raises 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 Reserve’s 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 prices 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 than 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 resales.

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
HOUSING SLUMP NOT ALL DOOM AND GLOOM
mortgage money should help shorten the current housing down
cycle compared with credit-squeezed periods in the 1980s, 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 broader 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 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 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, and “portraying it as a catastrophe.”

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.”

Kenneth Harney · San Diego Union Tribune · October 15, 2006

For more information on this article or assistance with your San Diego real estate needs contact Noel Wheeler of Prudential California Realty at (619) 718-4266 or visit http://www.noelwheeler.com/