“World Economic Health Hinges on Housing

    The above title is not my opinion but that of none other than Alan Greenspan, as reported by Reuter’s on Oct. 1^st, 2007 and on CNBC.  Greenspan went on to say that housing prices were likely to fall further and could bring the rest of the world with them.  “The critical variable in this judgment is the price of homes in the United States”, he said.

    Talk about putting pressure on the current Federal Reserve!   Greenspan has in effect put the resolution of the housing problem right on the doorstep of the shoulders of Fed Chief Ben Bernanke and the other board members.  Who else has the power to control the fate of housing in the short term? 

    In cutting both the Discount Rate and Fed Funds Rate by ½% on Sept. 18^th, 2007, the Federal Reserve has affected short term rates directly, and long term rates indirectly.  Remember, it is generally recognized that it takes 9 to 18 months for Fed Funds rate changes to filter through the economic system to affect longer term rates.  Moreover, the initial result on 10 and 30 year bonds is to have the opposite effect.  Since lowering rates also tends to lower the value of the dollar and increase inflation, long term bonds are not as good an investment.  When bonds are sold their yields increase, thus temporarily raising, not lowering, long term rates.  So initially, at least, the Fed’s actions resulted in increasing rates that most affect mortgage rates.  This does most often correct over time, especially when it is perceived that the Fed will issue further rate cuts.

     The greatest threat to the housing market is the further resetting of ARM’s (Adjustable Rate Mortgages).  So although these cuts should have little effect initially, they certainly will impact mortgage rates eventually.  In most experts’ opinions, it is the resetting of the ARM’s that is causing most of the problems in foreclosures.  Over $50 billion in ARM’s reset in October alone, the highest in history according to Moody’s.  Furthermore, as reported on CNBC by Wilbur Ross, the new majority owner of American Home Mortgage’s Servicing Unit, 2.5 million homes will have ARM resets in 2008.  That’s a lot of homes that will be in distress and bring even more pressure to bear on realty markets.  In order for the Fed to have an impact by then, they will have to continue to be aggressive with their rate reductions.

     Clearly, the importance of mortgage payment increases due to these adjustable rates will be a key factor in the recovery (or lack thereof) of the housing market.  That is one of the reasons, I believe, the Federal Reserve made such a bold move in cutting both the Fed Funds rate and the Discount Rate by ½% the same day.  It also will be a significant reason to do it again in their October meeting.

     Obtaining loans for home purchases has become a very real issue in many areas of the country.  According to the National Association of Realtors (NAR), recently more than 10% of home sales contracts fell through late in the process largely due to the borrower having trouble securing credit.  “The impact was greater in high cost markets that are more dependent on jumbo mortgages. In some areas, as much as 30% of signed contracts were falling through in August when the credit crunch problem peaked," NAR Senior Economist Lawrence Yun said.  Jumbo loans are those valued above $417,000   He continued, “Some credit-worthy people are trying to buy homes but can't because of the credit crunch,"

     I have not heard of credit worthy buyers having that problem here in the Phoenix area, but if this is occurring in other markets it’s worth noting and hoping that it does not spread to here.

     Projections of when the market will bottom have been given by economists, experts in the realty field, CEO’s of new home builders, and others.  Some are now estimating the bottom to occur late in 2008.  However, most of the builder CEOs forecasts range into 2009.  Some note the last time there was a decrease in home prices of this degree in certain areas of the country it took 7 to 8 years to fully recover.  So many facets of the problems we are facing in this area are unknown at this time and thus make the bottom hard to predict.

     However, my feelings and outlook are a little different.  By March or April of 2008 most of these problems and conditions which we face in the realty markets should be known.  Industry layoffs should be completed by then (now totaling over 71,000 according to Challenger, Gray, and Christmas).  The Fed should have completed its aggressive lowering of rates.  And the extent of the losses due to sub-prime collapse should be known.  As fear of the unknown is often the most debilitating and paralyzing of conditions, knowing what we are facing should bring about a change direction.

     Only time will tell, of course.  But let’s keep an eye out for a reversal of our housing fortunes this spring.

Chuck Fazio is an agent with Metro North Realty, one of the top 25 realty companies in Phoenix. For more information call 602.628.1411 or email ChuckFazio@hotmail.com