Housing Markets Benefit From Federal Actions

Housing Markets Benefit From Federal Actions

The housing market is beginning to benefit from recent actions taken by the Federal Reserve and U.S. Treasury to lower mortgage rates. Mortgage rates have quickly fallen to record lows in the last three weeks with 30 year rates now available at historically low levels. In late November, the Fed agreed to purchase up to $500 billion in mortgage backed securities as well as purchase $100 billion in additional Agency debt. The announcement resulted in an immediate 100 basis point tightening in mortgage yields. Lower rates translate into improved affordability for homebuyers as projected monthly housing costs decrease. The National Association of Realtors affordability index is at a ten year high and analysts also predict that as many as 50% of current homeowners may find it beneficial to refinance their current mortgages and lower their monthly debt burdens

Home prices have fallen significantly over the last two and a half years and they are beginning to attract purchasers, although some may be waiting for the credit crunch to show greater signs of ending. Particularly, with the recent decrease in mortgage rates, the economics of buying a home have shifted materially with the current environment strongly favoring buyers. Sales of existing homes have increased in the last seven months as existing inventory is slowly but steadily being pared down.

Home sales are currently running at an annual rate of 4.8M units which is about where the rate was 10 years ago. However, during the last decade, the population of the United States has grown by almost 10%, eight million new jobs have been created, and the percentage of households owning their own homes has risen from 66% to 69%, an increase of 3.2 million homeowners. Prices, interest rates, and motivated sellers make the current market one of the best in a generation to purchase a home.

The Fed and the Treasury continue to work towards stabilizing confidence in the banking sector and the overall economy. Actions taken to date include the $700 billion bail-out bill passed by Congress several months ago that is being used to infuse banks with over $300 billion in new capital as well as shoring up mortgage, asset-backed, and commercial paper markets. The Federal Reserve Board has also lowered rates to .25% from 5.25% 14 months ago. These actions combined with several other liquidity enhancing activities should begin to increase economic activity over the next few quarters.

Market participants continue to closely gauge the stock market, mortgage rates, and consumer confidence in attempting to find out if and when the economy has bottomed. Stock market investors are still reeling from the 40+% decrease in global stock prices since the beginning of 2008. Oil has dramatically fallen to $50/barrel from a July high of $147/barrel paralleling broad declines in most commodity markets. Prices at the pump have fallen almost 50% since the summer giving some relief to beleaguered consumers. The dollar has strengthened with the drop in oil, a quick slowdown in Europe, and a general flight to quality. Ten year interest rates are now in the 2.1-2.6% range as the stock and commodity markets try to find direction.

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