Tuesday, February 06, 2007

Good signs for slow market

If you are a homebuyer waiting for even better deals to come along before you sign a contract to buy a home, your wait may be over. It's unlikely interest rates are going back down in the short term but the most important consideration is that other buyers may start driving the market again. Here's why:

· The Federal Reserve has left short-term interest rates (the rates at which banks borrow money overnight) alone since August, following a two-year stretch of rate increases. Last week’s announcement that the FED left interest rates alone again at 5.25 percent suggests that the FED's actions are designed to slow inflation but so much that the economy is stalled.
Inflation (most often gauged by gross domestic product) shows that core prices -- excluding food and energy -- rose 2.1 percent in December, but that's still higher than the FED would like to see it, which suggests that the Fed might raise short-term interest rates sometime in the spring, which will eventually make mortgage loans higher in cost.

A humming economy means more jobs at higher pay, which is why unemployment is expected to remain historically low. With more money to spend, Americans will spend more money on homes, cars and other big-ticket items. Sliding gas prices at the pump to year-ago levels and below doesn't hurt, either.

Mortgage applications are up 1.3 percent, as of this week, possibly in anticipation of higher rates in the spring, says the Mortgage Bankers Association. That's still down six percent year over year but that's not surprising considering home sales were down 8 percent last year. Refinancings picked up 4.9 percent the same week. That's up 11 percent over last year, which suggests that some homeowners are switching to fixed rates, or they're improving their homes. Either scenario could spell fewer homes going up for sale as transaction costs coupled with a flat price environment means these homeowners are hunkering down for the duration.

The economy didn't slow down for the alleged housing bubble while it "burst" in the latter part of 2006. Despite rising foreclosures, the vilification of easy mortgage credit via interest-only and option mortgages, and flattening housing prices that eliminated homeowners' ability to use their homes as ATM cards, people kept spending, growing the economy at a much faster-than-anticipated pace of 3.5 percent in the final quarter of 2006. For all of 2006, including its highs and lows, the gross domestic product (GDP) increased by 3.4 percent. To get some perspective, that's faster than the best year housing ever had in 2005 when GDP improved 3.2 percent.
Homebuilding has receded about as much as it can to absorb standing inventory before builders start hammering again. Builders had a terrible fourth quarter with investment plunging 19.2 percent, worse than the 18.7 drop the previous quarter. For all of 2006, the totals were less ghastly - investment in home building dipped by 4.2 percent, but that's still the largest drop in 15 years. Incentives by builders have moved enough inventory so that the number of homes on the market are headed toward the normal range, which means those free granite counter upgrades will be no more.

Both the National Association of Realtors and the National Association of Homebuilders reported that inventories of homes are finally starting to recede from the flood. In December, new home units hit a 10-month low supply, down to a 5.9-month supply, or what industry watchers says is a balanced market. Existing homes were at a 6.8-month supply in December, down from a 7.3-month supply in November. As inventories evaporate, so does seller desperation.
In a flat-price environment (1.1 percent price increase for new homes) chafed by rising materials costs (4 percent annually,) homebuilders only have one choice if they're going to put more homes on the ground -- build the next generation of homes smaller and with fewer amenities, so they can keep prices low. Buyers who want cavernous living spaces had better step up to the plate now when they can get the most square footage possible for the money.
The Pending Home Sales Index, NAR's index based on contracts demonstrating intent to buy, rose 4.9 percent in December to an index of 112.4 from an upwardly revised level of 107.2 in November. That's 4.4 percent lower than December 2005, but up is still up.

While it would be great to buy at the lowest low and sell at the very top, even the smartest people in the world can't predict the exact moment when it's optimum to buy and sell a home, but the indicators certainly point to good timing for buyers who act now before the spring market.


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