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."