Low Rates And Price Stabilization Lead To Housing Recovery

Friday, May 7, 2010, 4:01 AM | 2 Comments

There are signs that low mortgage rates and stabilization in home prices could eventually lead the housing market back toward long-term growth averages. As we all know over the past few years, the housing market has been hit with lightening [along with fear of thunderstorm] from the sub-prime credit crisis and the resulting global financial meltdown.

What’s next for the housing market? Because the home prices went into deep shit and was so deep in many parts of the country, it may take many years to recover. Let’s analyze…

Some extraordinary and unprecedented measures …

The bank bailouts, government stimulus initiatives, mortgage relief programs, tax incentives, mortgage security purchases, and artificially low interest rates have created solid foundation and an extensive support infrastructure.

Some experts suggest that’s the kind of foundation and infrastructure we needed to stave off the complete collapse of residential real estate prices. Some folks may not think so but it seems that the complete collapse has been averted. Let’s hope so.

… have come to a stop

However, some of these extraordinary and unprecedented measures in support of the housing market have come to a close in two areas: 1) At the end of March 2010, the Federal Reserve stopped its program of purchasing mortgage-backed securities, and 2) after being extended from last fall, the tax credit for home-buyers ended on April 30.

Is the foundation still strong?

Only time will tell and it better tell us sooner than later. But in March, there was an upward surge in new home sales – 26.9% from February to an annual rate of 411,000 units, according to data released by the Census Bureau. Existing home sales also jumped by 6.8% in March to a 5.35 million unit rate, according to the National Association of Realtors (NAR).

The reason in the spike could be many home-buyers presumably rushed to complete purchases before the expiration of the second round of home-buyer tax credits.

What conclusions can we draw?

If the surge that occurred in March was because of the tax credit incentive only, then the housing market recovery could be temporary. If it is, in some experts opinion, because of the Federal laid out strong foundation and the extensive infrastructure, then we can expect the market to show upward strength in the coming months and years as well.

A word of caution

The mortgage interest is historically the lowest. Normally, one would assume that with the lower rates, demand for housing start would be high but it is not. This demand has kept falling even as the mortgage rate continued to fall.

There could be a strong rebound in housing activity if the trend somehow got inversely proportional, meaning as the interest rate comes down, housing starts would increase.

High inventory

The low demand and foreclosures have created a bigger inventory than normal to the tune of 8 months supply, according to the NAR. This is how long it would take to sell the current housing inventory at the current sales rate. At the end of the first quarter, there were 19.0 million vacant housing units, an all-time high.

In a Nutshell
The spike in March of new and existing homes can be temporary or the housing market may have started an upward swing and for the better. Let’s hope the later turns out to be true.

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  1. 2 Responses to “Low Rates And Price Stabilization Lead To Housing Recovery”

  2. By TomPier on May 7, 2010, 2:03 pm | Reply

    great post as usual!

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