Sustaining Economic Growth Key for Housing Turnaround
Continued growth in the nation’s economy is the best guarantee of a revival in demand for new and existing homes, NAHB Chief Economist David Seiders said in his latest “Eye on the Economy” column, and the heartening news is that the Federal Reserve appears ready to help foster the ongoing economic expansion however it can.
Beset by mortgage market woes, eroding house values in a growing number of areas and “a hefty shove from the media,” housing is continuing to lose momentum, Seiders said.
“But these negatives do not mean that housing will continue downward forever,” he said. “As long as the overall economy continues to expand, with the Fed’s help, throwing off decent growth in employment and household income, ongoing population growth will generate decent growth in the number of households, and that’s the key.”
Despite the current mortgage credit crunch, which is most pronounced in subprime borrowing, Seiders noted that there remains significant favorable financial support for prospective home buyers, particularly in the FHA/VA and prime conventional conforming mortgage markets.
With the greatest implications for home buyers in high-priced housing markets in California and along the East Coast, Seiders added that the jumbo mortgage market should “regain its footing before long” following its rapid deterioration in August.
“If these conditions come together, and if builders focus heavily on incentives to move inventory, it’s reasonable to expect home sales to stabilize by early next year,” he said.
Jumbo Loan Market Is Coming Back
Talking points prepared by NAHB for the association’s leadership and posted for members in a new significantly expanded version of the “Back to Basics” Toolkit emphasize that the jumbo loan market is staging a return.
“After going through a tough spell earlier, there are encouraging developments in the jumbo loan market,” according to NAHB. “Recently, this market has shown signs of stabilization. The Federal Reserve’s latest moves to cut interest rates have increased liquidity, which is an important step in easing the situation and restoring investor confidence.”
The availability of money for jumbo loans has improved for credit-worthy borrowers, the association notes, although interest rates on these loans have been roughly one percentage point above conforming loan rates and downpayment requirements are higher.
“Still, jumbo loans remain very affordable by historical standards,” NAHB says. “Unfortunately, because of the dire housing headlines, many consumers continue to mistakenly lump the jumbo market with the subprime woes. The biggest problem is simply getting the word out that mortgage money in the jumbo market is available at very attractive rates for credit-worthy borrowers. This is vital to boosting confidence and traffic of prospective customers.”
More Interest Rate Cuts Expected
Seiders said that the Sept. 18 interest rate cuts by the Fed have had some positive impact on the financial markets, primarily by stimulating the stock market and relieving liquidity problems in short-term credit markets.
Unfortunately, while those cuts are helping to bolster the economy and providing a healthy foundation for housing, they cannot immediately stabilize mortgage and housing markets, Seiders said, a point that was stressed by Fed Chairman Ben Bernanke in a recent address.
However, although the Federal Open Market Committee made no commitment on the future course of monetary policy, Seiders said he expects more good news from the interest-rate front, with additional quarter-point cuts at each of committee’s two remaining meetings in 2007.
In the meantime, average rates on 30-year fixed-rate mortgages have drifted up for the past three weeks, for the week ending on Sept. 27 returning close to their levels at the start of the month, according to Freddie Mac's Primary Mortgage Market Survey. They averaged 6.42% last week, up from 6.34% in the prior week and 6.31% a year earlier.
Freddie Mac Chief Economist Frank Nothaft said that rates on fixed-rate mortgages have been following the direction of rates on 10-year Treasury securities.
“Also tracking short-term Treasury notes, average rates on one-year adjustable-rate mortgages dropped by five-hundredths of a percent” last week, Nothaft said. “Though it is the fourth consecutive week rates on ARMs have declined, the share of mortgage applications for ARMs has been trending down, and last week reached its lowest level since March 2003, according to the Mortgage Bankers Association,” he said.
One-year ARMs averaged 5.60% last week, down from 5.65% the previous week but up from 5.47% a year earlier.