PREPARE FOR A VERY, VERY SLOW RECOVERY IN THE HOUSING MARKET.
I found it unfortunate that Chairman Bernanke included "Subprime Lending" in this his report on the housing market this morning. The subprime lending market effects real estate sales to a degree but I don't believe that the subprime lending market controls the real estate market any more than the price of Delicious Apples controls the price of apple pie. The only time a person would use a Delicious Apple in an apple pie is when they couldn't find a good Granny Smith apple. The only time a subprime loan is considered is when a person can't obtain a regular mortgage loan. Mortgage rates are a tremendous influence on housing. However, IMO, subprime loans are a small percentage of home financing.
Bernanke correctly stated that the "adjustment" in the housing sector is still ongoing. I believe it is important to note that Chairman refers to housing as a "SECTOR" since his view is much more to the overall economy than those of us who focus on housing as a "MARKET" rather than a sector of a market. He considers the slowdown in residential construction a mere "drag" on the overall economy.
THE TAIL ISN'T WAGGING THE DOG
Since he informs that the real gross domestic product (GDP), increased at an average 2 percent in the last 4 quarters, I believe that is one year, housing did NOT cause a LOSS in GDP. So, it appears that the significant, and it is significant, slow real estate market is not caused by the overall economy, since the economy is still growing.
LOOK AT HOUSING AS A MARKET ALL TO ITSELF
"From their peaks in mid-2005, sales of existing homes have declined more than 10 percent, and sales of new homes have fallen by 30 percent." Bernanke
Chairman Bernanke continued to relate the growth in housing prices of 9% from 2000 to 2005. He then states that house prices "decelerated" sharply last year. "DECELERATED"? Unfortunately, many of our housing market don't need to be DECELERATED. We need for prices to go DOWN. We need the housing prices to depreciate, deflate, lessen, lower, recede, slash, truncate, GO DOWN.
Chairman Bernanke also identifies one of the problems with housing, the inventory of unsold units. In many markets, builders build to contract, so they would not have "standing inventory". However, in areas where builders build and then sell, standing inventory is a serious problem. Bernanke believes that there is an approximately 7 MONTH BACKLOG OF UNSOLD NEW HOMES. This inventory has got to be a drain on the resources of new home builders and financing resources for new home builders. I would suspect that this may produce a weaning of builders where only the well financed large builders will survive. That will be interesting to watch.
Full text of Chairman Bernanke's "Remarks" can be found at:
http://www.federalreserve.gov/boarddocs/speeches/2007/20070605/default.htm
While he addresses the housing markets in the beginning of his remarks, his focus is really, IMO, on the lending and, in particular, the subprime lending markets. Why not?? He's a banker.
It's not really a matter of what the rate is. To me, it's a matter of purchasing power. Higher rates decrease the purchasing power and higher rates with higher prices depress the purchasing power.
I'm not sure that Chairman Bernanke has yet to focus on some of the causes of the slump in the housing market. He states some historical facts, price increases from 2000-2005. However, he does not focus on the nexus between the acceleration of home prices and concomitant rise in interest rates from 2004-2006. When the Federal Reserve raised the short term interest rate FOR THE 8TH TIME in June 2004, the downward spiral of the housing market began.
THE FED HAS TOO OFTEN FOCUSED ON THE GHOST OF INFLATION
Nothing is more interest rate sensitive than housing. The Fed is always interested in curbing inflation, even when there is none. Raising rates to control inflation when there is none, causes a serious reduction in the price range of the home for which the average home buyer can qualify.
HOUSING PRICE INCREASES IN MARYLAND
In June 2000, homes in this Montgomery County community sold for approximately $550,000.
In June 2006, the same homes sold for $950,000.
In June 2007, they are not selling at all.
mortgage mess, federal reserve
Courtesy: Homefinders.com
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Lenn, In my market Poinciana Fl the subprime fall out has brought sales to a screetching halt. Nearly all of my deals were subprime. Now they are no more and that teamed with an influx of overpriced homes and builder invertory just sitting has created dire straits for Poinciana. Take a look at this report I did yesterday:
Last year, there were 1,383 closings, in our two zip codes. This year, to date, there have been 273. Last year same period, January 1-June 2, there were 675. That's a 60% decrease in sales.
In April 2006 there were 142 closings. This year 48. That's a 66% decrease.
In May 2006 there were 129 closings. This year 51. That's a 60% decrease.
Currently there are 1,741 properties on the market and 123 under contract(pending).
It will take 2 to 3 years MINIMUM for thinsg to change in Poinciana Fl. "Florida Real Estate Broker will work for food" :)
Almost forgot, this analysis is comparing 2006 and 2007. 2006 was a down year. If I used 2005 figures it would look a lot worse. It was too depressing to even share.