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Five common questions about the housing market

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Posted: Friday, April 30, 2010 12:00 am

When people know that I am a Realtor, I invariably get questions regarding the current state of the real estate market.

While I can comment on the market conditions locally, I am in no way an economist. For answers to those questions I go to those who are more informed than I. One of these experts is the National Association of Realtors Chief Economist Lawrence Yun. In a recent NAR publication Mr. Yun addresses the most commonly asked questions on the economy and real estate.

How would you characterize the current state of the housing market?

It will be a fragile recovery. Existing home sales have come down from the brisk sales pace of late last year, when buyers rushed in to meet the original homebuyer tax credit deadline. Since then, sales have come down, though they remain higher than comparable months one year ago. The rush of buyers late last year greatly aided in bringing down inventory and has begun to stabilize home values. Inventory in recent months, however, has crept upwards. Home values are not declining as sharply as they have been for the past two years, but they are not yet on definitive positive ground either, broadly speaking. Some local markets, like Boston and San Diego, are ahead in the recovery process and have shown several consecutive months of positive price gains.

2. Is another surge in homebuying anticipated as the expanded and extended tax credit deadline approaches?

Yes. Remember that home sales had been falling for nearly 4 straight years, since the frenzy of activity in 2005. Then existing home sales squeaked out a positive gain in June of last year on a year-over-year basis as the tax credit stimulus finally filtered through the system. Sales then zoomed up 23 percent in October and by a whopping 43 percent in November. Sales still remain higher in more recent months compared to a year ago, but not with the same gusto. Based on last year's experience with when consumers respond in big numbers, we will have to wait till May and June closings for the second surge to occur. (Consumers have to sign the contract to buy by the end of April, but must close by the end of June to get the tax credit for most homebuyers, depending on qualifying conditions.) I do expect the second surge to occur, but we'll have to wait.

3. The Federal Reserve is ending their mortgage purchase program on March 31, which has helped keep mortgage rates at essentially rock-bottom. How much will the interest rate rise when this program ends?

The Fed has been a major buyer of mortgage-backed securities. Without this buying, mortgage rates would have been higherperhaps notably higher, particularly so in the early months of the massive financial crisis, back in late 2008 and early 2009. However, now with the financial market stabilized and banks making profits, there appear to be plenty of private investors who are willing to purchase government-backed mortgages. Just as the Fed steps away at the end of March, the mortgage rates need not rise notably if the private investors step in. I think this will be case. After all, getting about a 5 percent government-guaranteed return is much more appetizing than getting a 1 percent return on certificates of deposit. So if the private money flows into mortgages, then the mortgage rates could remain pretty much where they have been recently. However, keep in mind that the macroeconomic forces, unrelated to the previously-mentioned Fed mortgage program, will no doubt push all interest rates higher by the year end. The economic recovery induces the Fed to step off the gas pedal and raise interest rates. Furthermore, the massive U.S. budget deficit could soon push government borrowing rates higher, which then inevitably pushes up mortgage rates.

4. What happens after the tax credit goes away? Is the housing market toast in the second half of the year?

In the immediate months after the tax credit deadline, home sales will fall notably. The rush of buyers to meet the deadline will have left very few in the pipeline. The more interesting question is what happens in the several months after the tax credit deadline, say from October and onwards. The housing recovery will depend heavily on jobs and on whether consumers have regained their confidence about home buying. Job creation naturally brings housing demand. In addition, if the home values have definitively stabilized or even show some modest increases then the many people who have been on the sideline waiting for the bottom will no longer have any further reasons to wait. According to my estimations, there appear to be more than a usual number of renters with the necessary finances to buy a home, but have chosen not to because they did not want to purchase a depreciating asset. This suggests a bottleneck in pent-up demand. If home prices show several consecutive months of stability, then there could be a rise in housing demand from these financially qualified renting households. There is no guarantee, but job creation and the removal of the 'fear factor' regarding home prices will provide support when the tax credit goes away.

5. What will mortgage rates be in 2011?

By December of this year, the average mortgage rate could be close to 6 percent from the current 5 percent average rate. By December of 2011, the rate could be 6.5 percent. I do not foresee the rate going above 7 percent, at least for a prolonged period, in the next two years. The reasons for the increase are due to the macroeconomic forces of a recovering economy and a very high budget deficit. But relatively benign consumer price inflation will keep the lid on mortgage rates from rising too high. For those engaged in the jumbo market, you will note that rates are already that high. But the high rate on jumbo mortgages and on construction loans is due to the lack of government backing for these loans. From about the second half of this year, the banks will clearly have built up a strong capital buffer, and any further bank profit will then be used for lending to non-government backed sectors. So the mortgage rates on jumbo and commercial real estate could indeed fall a bit due to an improvement in the bank capital situation just as rates on conventional and FHA mortgages rise from macroeconomic factors

Melanie Pennino is the president of the Lodi Association of Realtors. You can reach her at

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