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Insights...Definitely Maybe!

This info is so good, I just had to post it here!


Definitely Maybe

By Lawrence Yun, Chief Economist, NAR Research

Lawrence YunA bit of good news appeared for housing recently. Pending home sales rose in December - after taking a sharp hit in November. The latest index of 87.7 is an increase of 6.3 percent from November's reading and is up 2 percent from the index registered in December of 2007. (See page 3 for more details.) Areas that are improving in terms of pending sales include many California and Florida markets. San Diego in particular is coming around very strongly, essentially experiencing a doubling in contract signings in December compared to the same month a year ago. In the Northeast, Providence RI has been a consistent gainer over the past several months. More markets in the Midwest are appearing to turn around for the better: Akron, Cleveland, Lansing, Louisville, Minneapolis, and Wichita all posted year-over-year gains in pending sales. Northern Virginia also has been tallying up higher figures. Some Maryland counties in the Washington DC metro area have also seen improvement. Oklahoma City and Tulsa, where the job market has been doing better and home prices have always been highly affordable, have also posted gains.

Other good news: existing-home sales rose 6.5 percent in December to a seasonally adjusted annual rate of 4.74 million units. While it's true that year-over-year resales are still down (3.5%), any increase in sales activity was certainly welcome. Inventory at the end of December fell notably by 11.7 % to 3.6 million homes available for sale, down from 4.16 million in November.

Despite some bounce back in unit sales, the median existing-home price in Dec was $175,400 - a decline of 15.3 percent from December 2007 median price. That is the largest price decline since 1968 when NAR began tracking median sales prices, and likely the largest price decline since the great depression. The proper causation is that lower home prices have begun to stir buyers off their seats.

The rise in December pending sales, while positive news, came one month after the lowest index reading since the creation of the index in 2001. Remember, actual home sales closings generally occur one to two months after a contract is signed. The January closing sales are hard to predict given the very weak November pending sales and some partial rebound in December. Also note there is not a direct one-to-one correlation between pending sales and closed sales.

Forecasting is a hazardous sport at times. With so many pieces of the puzzle now moving in opposite directions, the crystal ball reading has become even cloudier. Job cuts have been severe, with 3.5 million lost already, but affordability conditions are at the highest in nearly 40 years. Mortgage rates are at historical lows, but obtaining an approval has become a lot more difficult. Even FHA loans are putting up tighter conditions for home buyers, even those who are not overstretching. In the past, a person with a reasonable credit score and paying not more than 30 percent of their income on housing would have easily been approved for an FHA loan, precisely because of the government guarantee. That is not the case today - at least according to many REALTORS® to whom I have spoken.

I project soft existing-home sales in the first quarter before steadily trending up later in the year. By the fourth quarter of 2009, existing-home sales could be easily 10 to 20 percent higher than a comparable period the year before. Given the home buyer tax credit - without the repayment feature - I would not be surprised to see even a 30 percent jump. Rising home sales will be critical to trimming inventory, including the new foreclosed properties that will be reaching the market in 2009. Because of continuing soft home sales for at least few additional months, the inventory will remain bloated and pressure home prices to be weaker over the next six months. It should also be noted that the current lower price reading is partly driven by more sales activity in low-priced neighborhoods and far fewer sales in higher-priced neighborhoods. The problems in the jumbo mortgage market have stalled activity on the upper end.

The economic assumptions are that the Federal Reserve will hold pat and keep the fed funds rate at essentially zero for the remainder of the year. The economy is in a harsh recession and consumer prices will actually fall in 2009. The Fed has no worries on the inflation front, thereby affording it to keep rates low. The 10-year Treasury will remain close to 3 percent, while 30-year mortgage rates will average close to 5 percent. The low rates are for conforming loans only and not for jumbo loans. To bring jumbo mortgage rates down, the Fed can use its newly created lending facility (called TALF) to actively purchase jumbo mortgages directly. The Fed should, however, be very mindful to keep a watch on inflation just in case. With so much liquidity pumped into the system, a modest pickup in the velocity of money could quickly push inflation to an uncomfortable zone. High inflation will lead to high mortgage rates. Inflation must be nipped in the bud quickly should it appear. The jobless rate will rise close to 9 percent before the positive impact of a stimulus package kicks in. That will correspond to about 4.5 million net job losses from the peak employment at the end of 2006. The stimulus will be expensive, but it is needed to turn the economy around. We cannot afford another year of such job losses.

As I have said many times, the economy simply cannot recover without a housing market recovery. Measures to stabilize home prices must be aggressively pursued. Those include modifying mortgages to lessen foreclosure pressures and, more importantly, getting a new set of buyers into the market to soak up the inventory. Such strong housing stimulus components will help housing recover. The economy will then recover in a sustainable way. The budget deficit will steadily get trimmed as more workers pay taxes rather than collect unemployment benefits. America can and will survive through this mess.

For the latest economic forecast insights and analysis, visit

Copyright National Association of REALTORS®, Reprinted from with permission.



Marianne Snygg, GRI, ABR, ASP
Broker Associate
ERA Herman Group Real Estate

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Colorado Springs and Monument Real Estate

Comment balloon 1 commentMarianne Snygg • February 25 2009 10:45AM
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