The Forecast
By Lawrence Yun, Senior Vice President, Chief Economist, National Association of Realtors
Several positive developments in the credit market will pave the way for improving housing market conditions going into 2008. The worst in the credit crunch of August is clearly over. A bold move by the Federal Reserve in cutting the rate by 50 basis points in September and another 25 basis points in October helped with liquidity and even more importantly in lifting confidence of financial investors that the Fed will not permit a freezing of credit in the marketplace. Markets, therefore, have settled down and mortgage
rates have trend back down to about 6.3% on conforming loans - near historic lows.
Credit in the conforming market (under $417,000 loan and those that meet the GSE guidelines) has been widely available throughout the crisis. It was the jumbo loan market that was particularly hard hit with the spread over conforming loans rising to over 150 basis points, rather than the historic average of 20 to 30 basis points. The spread as of early October is down to about 60 basis points - though not back to normal, at least it is moving in the right direction. Many of the homebuyers in the high-cost regions who’ve gotten
frozen out of the jumbo loans will now be able to return to the market.
The subprime lending will definitely not return to where it had been a year ago. That is a good thing. While some subprime loans make sense, the vast majority of subprime borrowers likely did not know what they were getting into. Low-and-moderate income families will (and should) now look to safer FHA loans. They carry much favorable interest rates and they have infrastructure already setup for counseling and loss
mitigation.
Though the credit problems appear to be over, there is an overhang that looms large that could hamper housing market recovery. Inventory is high. But keep in mind that many people live in the homes that are listed for sale. These people are homesellers as well as homebuyers - unless they want to move into renting or selling a vacant home. A bigger concern on inventory is on newly constructed homes because they are purely vacant. Carrying a vacant home by builders is an expensive proposition and, hence, builders will be forced to provide more incentives and price cutting to attract buyers. Interestingly, inventory of newly constructed homes has been falling for the past 5 months thanks to major cut backs in construction by homebuilders. Inventory looks to be further shaved based on major further cutbacks in single-family housing starts and single-family housing permits.
Despite all the “negative” media coverage on housing, home prices in the region have largely held on onaverage. Sure, there are neighborhoods where home price declines are notable, and REALTORS® can pinpoint those areas. One principal reason for price stability is due to the fundamentally sound local economy. Job gains continue locally. Housing figures for September and October look to be weak, which will get officially reported well into late November, from the lingering impact of the August credit crunch.
However, the pent-up demand is strong (from accumulated job gains) and the recovery is around the corner. Expect higher home sales and home prices next year.
Copyright NATIONAL ASSOCIATION OF REALTORS®