Some robust stats contradict the
By Kenneth R. Harney, Washington Post Writers Group
October 15, 2006
WASHINGTON - 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 months 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%.
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
Donald L. Kohn, the Federal Reserve's vice chairman, took a stab at that
seeming conundrum in a recent speech 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. It is a "correction" that's underway - a cyclical re-balancing 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 f
acilitatethe re-balancing of supply and demand in those markets," Kohn said.
Not all home sellers have fully grasped the altered realities in theirown 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% increasein the latest monthly number of pending
home-sales contracts heading for closing nationwide reported Oct. 2 by the
National Assn. of Realtors couldbe a sign that Kohn's prediction is already
Second, said Kohn,the housing correction - expressed through new-home starts
- suggests we are 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 mortgage money should help shorten the
current housing down cycle compared with credit-squeezed periodsin the 1980s,
when mortgage rates sometimes exceeded 16% for fixed-rate loans.
A final key factor, according to Kohn: "Continuing growth in real incomes should
underpinthe demand for housing and, as home prices stop rising, help erode
Add it all up: Lower asking and selling prices on houses are integral parts of the
correction. 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% in the coming months, as some Wall Street
capital market analysts expect.
5.75% a possibility
James Glassman, a managing director at JP Morgan Chase, says 30-year
fixed-rate mortgages at 5.75% are a distinct possibility if long-term rates in the
global bond market continue to ease.
So, what's the source of some of the confusion about just where housing is headed?
Mike Moran, chief economist of Wall Street's Daiwa Securities America, minces
no words: The financial press and TV news shows are over-dramatizing what is a
normal and long-predicted cyclical re-balancing, 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 Assn., 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, Duncan said. Not only do the doom reports ignore the
positives out there in the marketplace - mortgage rates in particular - but also
"the rhetoric is just way overwrought."