How you see the real estate market at the moment depends on what parts you look at. If you focus primarily on mortgage rates and core affordability measures, you may see the country in a recession, but there are some very positive forces at work in the housing sector.
On the other hand, if you look at widespread employment losses — 530,000 last month alone — along with rising personal and business bankruptcies, mortgage delinquencies and foreclosures at levels not seen since the 1930’s, you might ask: How can housing rebound if the overall economy is mired in such a mess?
And of course housing can’t bounce back significantly unless national and regional economic fundamentals begin to improve. But there’s at least an outside chance that housing could help in that whole process — and begin to get healthier as a result.
Here’s why: Number one — affordability has dramatically improved since the end of the boom.
Thanks to severe price rollbacks and near-record low interest rates, homes are more affordable to households with average incomes than they’ve been for almost a decade. Standard and Poor’s economist David Wyss calls affordability a major bright spot, and that’s confirmed by the Housing Affordability Index compiled by the National Association of Realtors.
Mortgage rates are an important part of that equation, and they dropped again last week — this time below five and half percent for 30 year fixed rate loans, according to the Mortgage Bankers Association.
Add onto this the Treasury Department’s reported plan to cut fixed mortgage rates for home purchasers to four and a half percent through a “buy-down” program, and you’ve got the potential underpinnings for serious increases in home buying just over the horizon.
Some economists project an increase in sales of 500,000 to 700,000 homes in the coming 12 months if mortgage rates are cut by a point, AND if the new Congress agrees to include a non-refundable tax credit of up to 10 percent of the purchase price of a home in the economic stimulus package expected in January.
The idea here is to stoke up housing sales and construction — and dozens of other industries through housing’s well-documented multiplier effect — the stimulus it gives through ripple effects into building materials, appliances, furniture among others.
This has worked before. Congress took precisely these two steps — interest rate reductions plus tax credits for home purchases – in the 1970s, and the program had far-reaching positive effects on jobs and the economy as a whole.
It could happen again — even if, on any given day, the picture looks a little grim.