Monday, April 19, 2010

SLOW RECOVERY SEEN FOR HOUSING MARKET WHILE HOME-LOAN RATES RISE

Home buyers and sellers would love to gaze into a crystal ball this spring and have a clear view of the housing market’s future.

With Uncle Sam’s housing incentives about to end, and a jobs recovery is underway, even the brainy economists are wondering how fast the nation’s real estate market will rebound.

Yale economist Robert J. Shiller says sometimes home price booms and busts end quite suddenly. This is what happened in 1995 to 2006 boom, and the bust of 2006 to 2009.

“Today we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market,” Shiller recently observed in the New York Times.

On March 31, the Federal Reserve ended its program of buying $1.25 trillion of mortgage-backed securities, and economists say this action will put upward pressure on interest rates. And, the home-buyer tax credit will expire on April 30, perhaps sparking a slow-down in home sales.

Frank E. Nothaft, chief economist and director of Freddie Mac, says the current consensus is for a slow recovery, where the economy grows modestly and unemployment declines gradually over several years. The latest economic outlook by Freddie Mac predicts that the following factors will restrain U.S. economic growth:

• A banking sector weakened from the financial crisis.

• The negative impact of the economic crisis on household wealth and consumer confidence.

• An excess of existing for-sale housing units that will weigh on sales of new homes.

“Consistent with this view, Federal Reserve Chairman Bernanke has warned that unemployment rates are likely to remain elevated well into the economic recovery,” Nothaft said.

For the current quarter, Freddie Mac sees 30-year fixed-rate mortgage rates hovering in the 5-percent to 5.25-percent range. “These rates are still relatively low and, coupled with the home-buyer tax credit in effect on contracts signed through April 30, should help to promote a market that maintains a high level of home buyer affordability,” Nothaft said.

“We project home sales will rise about 10 percent for the year, relative to 2009’s annual volume,” he said. “However, the current large backlog of seriously delinquent mortgages remains a daunting prospect for many local markets across the country, and it may take two years or more to return to more normal housing market conditions.”

Another cloud hanging over the housing market is the specter of higher mortgage rates. Economists say higher interest rates are the inevitable outcome of the nation’s ballooning debt.

Freddie Mac reported in early April that benchmark 30-year home-loan rates rose to 5.21 percent, the highest level in eight months. Experts say each increase of 1 percentage point in mortgage rates adds as much as 19 percent to the total cost of a home.

The Mortgage Bankers Association is forecasting that 30-year fixed loans will rise to 5.5 percent by late summer and as high as 6 percent by late 2010.

All of these forecasts point to a very clear view in that crystal ball. If you are planning to buy a home, better do it sooner rather that later and lock in a low rate now on a long-term mortgage.