How buyers could save
the housing market
With
real estate on the skids, which matters more to potential buyers:
Declining mortgage rates or falling home prices?
The
housing market, like a bull in the ring, is wounded yet still powerful. It
takes an experienced toreador to discern whether the beast will succumb to
the knife or come charging back. The course it takes may hinge on which
matters more to buyers: falling interest rates (a big positive) or fear of
falling prices (a big negative).
For
now, at least, housing construction is clearly in a localized recession.
On Nov. 17, the Census Bureau announced that starts on construction of
single-family homes plunged 14.6% in October, to the lowest level since
July of 2000. On top of that, permits fell 6.3%, to the lowest level since
December, 1997, indicating that construction could dip even further in the
months ahead.
But
that's not the end of the story. Buyers could still save the housing
market, depending on how they react to current economic conditions.
Mortgage rates, after rising at the beginning of this year, have dipped in
recent months, from a peak of 6.8% on average for a 30-year fixed loan in
July to 6.24% last month, according to FreddieMac. There's also
speculation that the Federal Reserve could cut rates in the months ahead,
if inflation is under control and the economy flags.
Divided economists
If
buyers take heart from the decline in mortgage rates and step up to buy,
the backlog of unsold homes could shrink quickly -- especially with the
production of new homes having abruptly fallen. That would put the market
back on sound footing within a few months. On the other hand, if potential
customers decide that an investment in housing is "dead money" because
home prices are going to flatten or decline for an extended period, then
no jiggering of interest rates is going to encourage them to part with
their down payments.
Economists are sharply divided over the prospects for housing because they
disagree over how potential buyers will react. Ian Shepherdson, chief
North American economist of High-Frequency Economics in Valhalla, N.Y., is
a bear on housing because he thinks the prospect of further price
declines, or at least a lull, will scare away buyers. During the boom, he
says, people were effectively being paid to buy homes because the annual
appreciation they got was greater than the interest on their loans. That
is no longer true.
But
economists who are more bullish say buyers don't seem to be frightened
despite the flood of bad publicity about housing. They point to the recent
resilience of demand. For example, the Mortgage Bankers Association
announced on Nov. 15 that its seasonally adjusted index of mortgages to
purchase homes rose 2.7% in the week ended Nov. 10, to its highest level
since July. The biggest factor: lower mortgage rates. Rates for 30-year
fixed mortgages fell to 6.15%, their lowest since January, 2006.
Waiting for the
recovery
And
people are putting those mortgage loans to work: Sales of both new and
existing homes are up from their summer lows. "We're probably seeing the
turn. We're starting fewer homes even though we're continuing to sell
them," says Michael Englund of Action Economics.
The
housing slump is far from over, but the conditions for an eventual
recovery are in place: Builders are sharply cutting back, and buyers are
cautiously continuing to buy. That means the backlog of unsold homes
should begin to diminish. The welcome decline in mortgage rates may seem
small compared to the reversal in price trends, from soaring to sinking.
But it appears enough to put at least some people back in a buying mood.
--
Peter Coy, economics editor for
BusinessWeek.com
