NAR News: Taking a look back
By Lawrence Yun
Chief Economist, NAR Research
Rewind back to 1998. That’s 10 years ago when we were all younger and more energetic. You never imagined that today you would be so different from the person that you thought yourself to be in a decade’s time. Plans got squashed, chance events appeared, and gut decisions interestingly turned out to be right. That’s the unpredictable journey of life.
What’s different today?
There are 25 million more people living in America today than in 1998. Employment has grown by 11 million. The typical family income grew from $47,000 to nearly $60,000 in the past 10 years.
The stock market roller coaster ride can be quite scary, but the Dow Jones Index has moved up from 9,000 (an all-time high at that time) to today’s 12,500 or so. Interest rates are much lower today than in 1998. Yes, home prices are higher, but the housing affordability index – which takes into account people’s ability to buy a median-priced home at prevailing mortgage rates – is quite comparable between the periods. The index was 137 in February 1998 compared to 135 in February 2008.
The current 10-year low home sales activity can partly be justified by the virtual non-existence of subprime loans; in recent years, those loans accounted for about 20 percent of mortgage originations. But 10 years ago subprime loans were essentially non-existent as well. Conforming and government-backed FHA and VA loans have tighter underwriting standards – but underwriting standards for those instruments were pretty much in place 10 years ago. What is limiting housing demand, therefore, cannot be explained by fundamentals. The soft housing demand is psychological. It is a crisis of confidence.
Bolstering buyer confidence
Buyer confidence can be fixed quickly with a financial inducement: a tax credit for home buyers. D.C. home buyers enjoy it. Why not apply it to the whole country? Given that the housing slowdown is pushing the economy to the brink of recession, why not resuscitate the sector that is being held back by factors other than fundamentals?
Though the pace of closed sales in February rose ever so modestly, the latest slippage in the pending home sales index – to 84.6 from 86.2 in the prior month – continues to point to soft sales activity through early spring and possibly through early summer this year. Granted, an era of successive deep sales declines appears to be over, but the 10-year low sales activity is unjustifiable.
The government-sponsored housing enterprises can help. Fannie Mae and Freddie Mac have not yet participated in what was previously the jumbo loan market. Though legally permissible now, they have not yet entered the market due to the need to reprogram software and paper documents. They have indicated mid-April as the likely starting point when jumbo loans will be picked up in bulk from lenders, which would then replenish lenders’ capital so as to permit more loan originations at favorable interest rates. Once that happens, expect a lift in median home prices which have been artificially depressed to date due to very few jumbo loans and very few expensive home sales.
With an anticipated pickup in home sales (or a guaranteed pickup in home sales with a home buyer tax credit) in the second half of the year, the economy will also begin to grow. The combination of the recently-enacted fiscal stimulus package and the usual lagged impact of monetary policy decisions will further help jump-start the economy in the second half of 2008. That should help stem the tide of any incoming “formal” recession.
U.S. exports have been on a tear and that also will help keep the economy slipping into a recession in the first half of the year, despite the soft housing sector. January’s exports soared to $148 billion, up 16.6 percent from a year ago, nearly a doubling the level of exports at the turn of the century.
Another factor that will help the economy avoid recession is slim business inventory conditions. Housing inventories are high, but business inventories are low. The current wholesale inventory-to-sales ratio of 1.09 is at an all-time low while the retail inventory-to-sales ratio of 1.48 is only a tad higher from its all-time low.
The bottom line on the economy is for zero growth in the first half of the year, but two percent economic expansion in the second half. The unemployment rate will reach 5.7 percent by election time because of the lagged impact of zero economic growth in the first half. Rising unemployment mitigates inflationary pressures and the consumer price index will decelerate significantly by the year end.
Rising home sales and rising home prices at the end of the year will mark one heck of a recovery after so many unprecedented disruptions. The foreclosure starts will begin to drift lower by then. The Fed, Congress, and the White House all need to be commended in getting America rolling again.
Reprinted from Real Estate Insights, April 2008, with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2008. All rights reserved.
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