We are in the midst of one of the worst financial crises in a generation. The confusion in the markets has also affected consumers — some consumers mistakenly believe mortgage loans are not available. However, massive government efforts are being made to ensure mortgages flow to qualified consumers. There are loans out there!
Part of the government’s original $700 billion plan to purchase troubled mortgages and take them off banks’ books is being shelved –primarily because of the long-time involvement to implement it effectively. Instead, the money will be used to quickly strengthen the capital position of financial institutions and support securitization for consumer financing. The goal is to get capital to lenders(banks, mortgage companies, other financial institutions) so that they can start issuing loans to consumers and companies. In one sense the plan is working; the LIBOR rates – the key rate measurement of liquidity flow in the financial system — have begun to thaw after being essentially frozen.
Perhaps also a bit confusing for consumers, against this turmoil of financial and credit concerns: housing affordability has been improving consistently over the last few months. Affordability is as high as it’s been since 2003. The latest NAR Housing Affordability Index stood at 135.2 for September – up from August’s revised reading of 123.3 and a third consecutive monthly increase. That means that a family earning the median family income has 135 percent of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. That improved affordability has led to improved home sales. In September, existing-home sales rose more than five percent from the level in August. In Arizona, California and Nevada, sales rose 20 percent or more between the second and third quarters of 2008. In fact, 19 states experienced increased or no change in sales during that time. Those home sales are helping to work off housing inventory.
Shrinking inventory is another sign that the real estate market is stabilizing. Inventory of new homes has been falling since posting a peak supply of 570,000 new homes in August 2006. As of September 2008, new-home inventory had fallen to 394,000. The inventory of existing homes has also declined – from an 11.2 month supply in April to a 9.9 month supply in September.
The U.S. economy has entered a recession and will contract for the next three quarters, and the recovery, from the second half of 2009, will be tepid. The unemployment rate will rise through the middle of 2009 before steadily heading down. However, existing home sales will be rising despite challenging economic times.
The most important factor driving home sales is affordability. With home prices falling in many parts of the country and mortgage rates still near historic lows, affordability conditions have markedly improved. Even with rising unemployment, nearly 93 percent of households will have jobs. This 93 percent of working households (rather than 95 percent during good economic times) respond to incentives. Added measures, from the first-time homebuyer tax credit to a larger number of mortgage loans qualifying to be purchased by Fannie and Freddie and through the FHA program, will further bring homebuyers to the marketplace.
Back in the previous recession, the economy shed nearly 2 million net jobs from 2001 to 2003. All the while, existing home sales rose from 5.2 million to 6.2 million just as jobs were being cut. New home sales likewise rose from 900,000 to 1.1 million. Mortgage rates were falling and housing affordability was rising during these years. The 2 million job cuts were painful, but the economy still had 130 million job holders.
America and its exceptional ingenuity always finds a way to move past crises and back to economic prosperity.
