| A Hope Filled Week |
| Written by Jonathan Smoke | |
| 01.25.2008 | |
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Discuss this article on the forums. (0 posts) It has certainly been an interesting week in terms of sentiment and direction for the economy as a whole and housing in particular. Rarely does a Super Bowl entertain with as much momentum shifting as we have seen in the financial markets this week.  We started the week with it looking as though the U.S. economy were doomed to recession and would take the world economy with it. We’ve ended the week with a lowered Fed Funds Rate, the possibility of more lowering in the week ahead, and a multifaceted stimulus package being finalized in Congress.Can these actions help housing? Let’s review what’s wrong with housing now. We are describing the overall U.S. housing market as being in a downturn with the national levels of sales down along with prices. As we’ve pointed out repeatedly, conditions are not bad everywhere. There are many markets where prices have risen. But, in general sales are down most everywhere and inventories are at significant highs. The reasons for individual markets being in this down condition vary, but in general markets are falling into three distinct groups:
Will this week’s actions help each of these types of markets? Lower mortgage rates and the plan to expand temporarily the conforming loan limits from $417,000 to $625,000 will help bubble markets significantly. So much so that I’m hearing some criticize the plan for propping up elevated prices in those markets that still need a correction. But as we reach the peak of the subprime resets, lower ARM rates and higher conforming limits will help more households avoid foreclosure and dumping more inventory on the market. The $300 to $1200 rebates and business tax incentives may also help the markets that are in decline economically. I wouldn’t count on it turning those markets around, but a disproportionate number of households there are suffering, so they should get the most benefit out of the fiscal stimulus moves. But will these moves help the third category of markets—the ones that are healthy economically and in no need of price correction? I think they will for three reasons. First, what likely caused a portion of the moderate declines felt in markets like Atlanta was a lack of capital to finance home purchases. We’ve heard lots of anecdotal stories about cancellations forced by an inability to get financing, even by people with good credit. So if the actions this week lower rates and prime the pump to get credit flowing again, it must have some impact. Second, lower rates and a higher conforming loan threshold will make a purchase more tempting at all but the luxury end of the pricing spectrum in non-bubble markets. By my rough estimates, almost 70% of all homes sold in Atlanta (new and existing) in 2007 were under $650,000. Making all of those financings conforming will lower the points and rates on the mortgages, and that’s on top of rates now at 4-year lows. Combine lower financing costs with home prices lower than they should be, consumers will find it more difficult to sit and wait to ensure we’ve hit the bottom. Finally, I sense a very critical swing in mood this week. Many are starting to question if we are at or near a bottom. There’s light at the end of this tunnel indeed. And in markets that didn’t experience a bubble and are healthy economically, there’s no reason to be in the tunnel in the first place as long as capital is available. Here’s hoping for more hope filled weeks to come. 
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