October 2006
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In this Issue: How Long Will This Housing Slump Last?
How Long Will This Housing Slump Last?
The expert consensus: The slump could last into summer 2007. And the speed could depend on how many people hit the panic button or take their homes off the market.
Last month, the median price of a single-family home was down from a year ago — the first significant national decline in 13 years, according to tracking of previously owned homes by the National Association of Realtors. The median price for all housing types was $225,000, down 1.7% from August 2005, when the median was $229,000.
Historically, it's rare for prices to sink far nationally even when recessions occur. The Realtors association predicts a return to stability next year. But some economists are forecasting a tougher climate, thanks to an extraordinarily large run-up in prices in the past couple of years and homebuyers' increasing reliance on exotic new types of mortgage loans. Merrill Lynch predicts a 5% home-price drop in 2007, while Goldman Sachs, another New York investment firm, forecasts a 3% decline nationwide.
After a five-year boom in the housing market, where home prices head from here could have a significant impact on the direction of the economy and on the pocketbook finances of millions of families. But economists differ in their forecasts of how the current real estate cycle will unfold.
One new uncertainty in this cycle is today's greater reliance on adjustable-rate mortgages. With the interest rates on those loans shifting upward, a key question is how many owners will have to unload homes they bought during good times when values were rising and interest rates were low.
The decline in last month's prices of new homes on a seasonally adjusted, year-over-year basis is the first such drop since February 1993, except for a very slight blip on a seasonally unadjusted basis in April 1995.
Prices may continue to fall, since many of the leading economic indicators have continued to weaken.
The home builders' sentiment index is continuing to decline, as are the number of pending sales of existing homes. Applications for mortgages also remain soft. And the inventory of unsold homes continues to rise, now up to 3.9 million homes, about double what it was in 2003 during the height of the housing boom.
"The housing market is weak and getting weaker," says Mark Zandi, chief economist for Moody's Economy.com. "It appears the downturn has a ways to go."
"The rising number of unsold homes reflects the home sellers who were hoping to cash out at a high price and have kept their homes on the market for an extended time," says Mr. Zandi.
Some of these trends are likely to continue, until next summer, says Zandi, when he expects to see housing start to stabilize. With such a long period of weakness, he says, it's beginning to look as if home prices might fall in 2007 by about 5 percent on a year-over-year basis. He adds, "This would be the first calendar-year decline since the Great Depression."
By Mark Trumbull and Ron Scherer with permission from The Christian Science Monitor (http://www.csmonitor.com) (September 26, 2006) © 2006 The Christian Science Monitor. All Rights Reserved. For permissions, contact copyright@csmonitor.com.
Mortgage Rates Continue to Slide
Mortgage rates fell for the ninth time in 10 weeks as inflation anxiety calms down, according to Freddie Mac's weekly report.
For the week ending September 28, 2006, the average 30-year fixed-rate mortgage was down to 6.31% from 6.40% the week before. One year ago, the 30-year fixed averaged 5.91%.
The 15-year fixed-rate mortgage was also down. It stood at 5.98% for the week, down from 6.06% the week prior. One year ago, the 15-year rate averaged 5.48%.
The five-year hybrid ARM fell to 6.00% from 6.08%. One year ago, the 5-year hybrid averaged 5.44%.
The average one-year ARM was also down this week to 5.47% from 5.54% the week prior. One year ago, the one-year stood at 4.68%.
The week's economic data played a role in the decrease of mortgage rates, according to Freddie Mac vice president and chief economist Frank Nothaft.
Nothaft explained "This week's economic releases, which showed a slight one-year decline in both new and existing house prices in August, fell short of market expectations and prompted market analysts to reassess how much the housing sector will contribute to economic growth in the coming year.
As a result, mortgage rates declined even further this week to match those set six months ago," Nothaft continued. "One bright note in the releases was that the average time new homes stood for sale narrowed from 6.6 months to 6.3 months in August, which should mitigate some of the softening of new home prices over the next few months."
Winter May Mean Cheaper Heating Bills
After years of relentlessly rising heating bills, homeowners are likely to find some relief this winter. Supplies are plentiful, and prices are falling for natural gas, heating oil and propane. The cost of natural gas on wholesale markets is about half of what it was last January because of high inventories and the anticipation of record amounts in storage by the time the heating season begins in November.
Gas is the most widely used source of fuel for residential heating in the country especially across the Midwest.
Fuel oil, which is used heavily in the Northeast, also has seen dramatic price cuts in recent weeks as crude oil prices have declined and inventories of the fuel have increased. Propane prices also have dropped amid substantial supplies, according to the Energy Department.
But government analysts and industry executives cautioned that weather remains an unknown. If the winter turns unusually cold, heating prices again could jump.
Another major factor could be the cost of crude oil, which has fallen by one-fifth since reaching a brief high of $78.40 a barrel on July 14. That has seen the wholesale price of fuel oil drop by about 40 cents a gallon since early August.
The price of $1.58 cents a gallon for fuel oil on the spot market recently was 32 cents cheaper than a year ago, according to the federal Energy Information Administration. The price has rebounded some in recent days to $1.66 a gallon on the New York market. Natural gas has seen an even sharper decline.
Last year, as the oil and gas industry struggled to recover from the lost production caused by hurricanes Katrina and Rita, there was widespread worry that winter heating bills would soar out of sight. But then, the warmest January on record brought down demand and tempered some of the expense for consumers.
Still, heating costs have been on the rise for a succession of winters, and any reduction this year will be a welcome relief from the increases of the past few winters.
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First came a slowdown in the volume of home sales. Now prices are falling, and the questions for anyone selling, buying or even just hanging onto a home are: How far and how fast?
