Home buyers are returning this fall - part 2
Ten days ago after the Fed calmed the markets' credit panic with a 1/2 point cut in the Discount rate, I postulated that home buyers will come back this fall when the Fed finally drops the Fed Funds rate, and mortgage rates drop. It's now almost certain to happen. Here are the parameters in play now:
1) The stock market upticked yesterday because the Fed has essentially admitted to following through on the rate cut and support the ailing housing market. Expectations have been set::
from David Fry's Market Outlook for Thursday2) I haven't seen any discussions on this yet, but the stock market now has a ceiling on it until September 18 when the FOMC meets to announce the rate cut. If the market gets too exuberant, the Fed may decide against the rate cut because we all know the Fed will use any excuse to avoid the cut. That's one reason why yesterday's rally fizzled today... I believe most traders understand the ceiling effect and won't get caught long because the Fed can't be trusted to do what it's "expected" to do... that surprise August 16 discount rate cut just killed the short sellers with a rally.
“Federal Reserve Chairman Ben Bernanke reiterated that the Federal Reserve is closely monitoring markets and is ready to act if necessary.” MarketWatch
Bernanke also suggests that some “creative thinking” be applied to allow subprime borrowers a chance to refinance. This reads to me like a bailout proposal.
These statements ignite a rally.
3) The Fed will wait until September 18 for the rate cut decision, but until then, the markets will use any bad news to sell off, perhaps forcing the Fed into a pre-emptive rate cut before September 18 should another panic happen. I don't think this will happen.
Conclusion:
After September 18, the market will do a reset based on how much the Fed eases interest rates, but by mid-October, mortgage rates will become lower across the board and lenders will offer more consumer products (remember, the current competition for loan products has been curtailed due to the closing of all those mortgage shops). The window for these low rates will last as long as the economy continues its slowdown. Buyers will take advantage of this window because they will understand that interest rates will be under inflationary pressure and could rise as soon as the economy seems stabilized again.
Updates 8/30 10:00pm pdt -
Bush will expand government role to deal with subprime crisis - so his administration avoids being targeted for criticism from this Financial Katrina.
Bernanke under pressure to tip his hand - his objective at tomorrow's Fed retreat in Jackson Hole is too insure the markets don't go higher... or lower...
"This is a tricky balancing act," said Ian Shepherdson, chief U.S. economist for High Frequency Economics. "If Mr. Bernanke sounds hawkish, he runs the risk of inducing further chaos in the markets as expectations of easing are unwound. He will not want to appear too dovish, however, in case the markets start to discount even more easing."
Technorati Tags: Fed, Fed funds rate, discount rate, rate cut, housing market, interest rates, mortgage rates, FOMC
I don't know if I agree with that analysis.
I think the latest down turn had more to do with hedge funds re-setting their overstated assets than any real credit crunch. I believe it was an opportunity for them to recast their balance sheets inline with the loses they'll be taking on the MBSs.
I don't really have any faith that the fed will cut rates, why should they. Corporate profits are up, unemployment is low, there is no compelling reason to cut. If overleveraged lenders like CFC can't borrow against their portfolios, its because they didn't diversify enough and BofA will snap them up for a discount. Rates are still lower at historic lows. I'm not sure there is a reason to lower rates.
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I agree with your analysis - in fact I agree with the FOMC that inflation needs containment because I tend to look at the US economy in relationship with global economies and believe a weaker dollar (that accompany lower interest rates) can potentially cause more instability and global panic. But look at the whole picture today... although the Fed doesn't want to cut rates, it has painted itself into a corner with its recent statements... just a perusal of the media will show the market pressure for lower rates. I just noticed a Bloomberg press release this evening that Bush is trying to involve the government into helping those affected by the subprime crisis... now there's political pressure too.
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We'll I'm not sure that "people affected by the subprime fallout" means lower rates. I'm thinking that means FHA and the GSEs jump in to bail them out. Helping out the little guys isn't really in a politicians blood, i'm sure the hedge funds are saying, if we fail, there will be no one to by the commerical paper and the lenders will fail because we'll be gone, this will bring housing to a halt. So yea.. bush is going to use this to help out those funds.
I really hope the fed drops rates... it will inject some confidence into the system. I'm just not convinced.
As for a weak dollar, I'm for that, at least for a little while. It will bring back non-US investment dollars. It also may allow us to compete in some industries that have been outsourced over the last few years.
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I have a lot of respect for Bernanke... even though he has stubbornly avoided interest rate cuts for a year, essentially hurting the housing market recovery which affects us as industry folk, he has shown he can adjust to the markets in a crisis.
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In this down market the worst thing an agent or broker can do is to stop promoting their office, website, or property listings to save money. Even in a down market 80% of home buyers will still use the internet to find their next home or agent.
The best thing for agents and brokers to do is to develop their marketing strategies, and improve on their website. You should work on improving your own website and finding cost effective programs that promote you and bring traffic to your site.
There are also many programs on the web that will promote your real estate listings.
You have more listings and you need to get them out to as many people as possible to increase your exposure, and to sell more homes.
We have found a great new Real Estate Search Engine that allows you to advertise your office to home buyers, and also help promote your listings.
They use an interactive Google map that helps home buyers locate homes. They are also the first real estate search site to offer on site live chat support for home buyers, sellers, and agents. If a home buyer is looking for a home and needs help they have trained representatives to help them find a home and direct them to an agent.
They not only display your listings on their own site, but they also send your listing out to other real estate sites to help get you the maximum exposure and leads.
The agent listings are exclusive one agent per zip code and the key areas are going to sell fast. This site is offering some of the most innovative and useful tools for home buyers and agents.
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I have only been in this business fro about one year, I was wondering if there is any hope for a rookie like me to have a chance in this environment. I worked for a big company here in Brea, California and I have my own website and farming twice a week and so far I have not had any luck.Is there any suggestions,please I am not looking for get rich quick scheme,and I know I have to earn my place.If there is suggestions I will be happy to heat them.
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Here's a timely article from Active Rain's Bryant Tutas that addresses rookies:
Help! I'm a newbie and can't compete!
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Will the home buyers come back before the Stanford-Cal game? That's tough to say. Lower prices will help, lower rates will, too.
I think the market needs to absorb excess inventory (through lower prices or listing withdrawals) before we see stabilization.
There is no doubt, in California, that we have experienced the beginning of a housing recession. The question is...how long will it last?
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Cal looked great last weekend (from a Bears alumnus
I think there's pentup buyer demand in the Bay Area, and the inventory is still fairly tight, so I expect buyers will start to return with lower rates. But California is a bifurcated market - the Central Valley and other subprime / investor financed areas will continue getting hit by the recession.
Although the housing bubble proponents believe lower interest rates will not solve the housing market problems and continue to posit that housing prices should drop steeply to restore 1999 real estate economic fundamentals, I think a window of lower rates will eventually balance out the supply and demand for housing and prices will stabilize on a a timetable based on how much inventory oversupply there is. Using California as an example, the balancing will start with in-demand locales like the SF Bay Area and LA, and moving outward towards the Central Valley.
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I'll have to agree on that one. I've seen a lot of cash sitting on the sidelines waiting for prices to come back to earth. Homes in CA are a little overvalued, prices are retreating a little, I think they need to drop a little more, before folks start jumping back in.
Oh and GO BEARS...
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OK, Michael, you fooled me... I had to check your bio on your site to realize you're from Chicago... good move!
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I laughed when I saw this when you first published it and set up a reminder to revisit it at the end of the year.
Still laughing.
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Yes, I got this completely wrong... I expected the Fed to act quicker with rate cuts. I'm not making any more predictions on the housing market bottom until I see how the Fed reacts and what the consumer sentiment is.
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Hey, I'm impressed you admitted it. Most don't. Dr. Phil would be proud.
That aside, IMO people have put way to much emphasis on the Fed and rates. The run up that occurred in 2003-2004 was aided by the equivalent drop in rates based on indexes like the MTA and Libor that bottomed out around 1%.
Fixed rates during that time frame were available as low as 5.25%, yet they accounted for only 35% of the loans funded. The ability to get a $700k mortgage for $2k a month vs the fixed version that would put payents in the $3500-4000 range allowed people to buy up - way up.
Fast forward to today and if rates were in the mid 5% range, you would still have only the same 35% (maybe less now with stricter underwriting) who could afford to buy.
When prices in bubble markets drop to 2002-2003 levels, buyers will come back. The Fed can't control that because it's now a function of the open market, not monetary policy.
The other side of the coin is that falling prices are a double edged sword for lenders. We are moving beyond the debate of liquidity; it's now about solvency.
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Good points. I'm far more pessimistic now than last summer. I still think the "bubble markets" are those with inventory overhang - Miami, Sacto, San Diego, LV - and prices will drop to 2002/3 levels to start attracting vultures and bottom feeders. However, areas without inventory - SF, Seattle - will stabilize more quickly because there is no building going on.
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Back in Sept when Brian stated that the market needs to absorb excessive inventory, I took a look at just how many total active listings there were in Sandicor... There were Over 20,000! Today there is less then 15,000.
I believe what we were seeing was a Herd mentality where several thousand "sellers" had placed their homes on the market, with no real intention of selling.
Fortunately, it appears that over 5,000 of those "sellers" have taken their homes off the market. It is my prediction that when the active listings get under 12,000 we will again see across the board price appreciation, if interest rates are still low and banks are still willing to fund loans.
BTW, in 2002 the median Resale home price in San Diego County was $339,000 for a Single family detached home on sales of 30,177 homes. The median price of a condo in 2002 was 237,500 on Sales of 13,992 units. For Dec of 2007 the Median SFR sold for $470,000 and for the year there were 15,376 sales. In Dec. 2007 the median attached home sold for $311,000 and for the year there were 9,637 sales. In order for home prices to reach 2002 levels we would need to see inventory levels to remain high plus the median home price would need to drop over 28%.
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