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Some robust stats contradict the 

market-gone-bust reports 
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 

direction? 
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 

taking shape. 
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 

affordability constraints." 
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," 

he said 
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."

 

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