The Top 5 Housing-Market Hopes for 2009

Here Are the Five Best Reasons to Be Hopeful About Housing in 2009:


Luke Mullins
US News and World Report
Thursday December 18, 2008, 11:02 am EST

1. Cheap mortgage rates: With inflationary pressures easing and economic concerns mounting, shell-shocked investors are seeking the protection of government securities, such as 10-year treasury notes, driving down yields. The lower yields, coupled with the Fed's recently announced plans to buy up debt and mortgage-backed securities from Fannie Mae and Freddie Mac have dragged mortgage rates to multi-year lows. Thirty-year, fixed mortgage rates hit an average of 5.47 percent last week, the lowest they've been since 2004, according to Freddie Mac.

To be sure, not everyone will be able to take advantage of these attractive rates: Tougher lending standards will prevent many would-be buyers from getting into the market, while homeowners whose houses are now worth less than what they owe on their mortgage won't be able to refinance. Still, the rates present a welcome incentive for qualified borrowers to step up to the plate. "Lower mortgage rates mean more people with those credentials will be able to qualify," says Patrick Newport, a U.S. economist at IHS Global Insight. While that might not make a dramatic impact on the market, it could be enough to keep home sales from declining as much as they otherwise would, Newport says.

2. Lower prices: Home prices at the national level have already fallen 21 percent from their 2006 peaks. And in certain bubble markets, the crash has been even steeper--prices have fallen more than 30 percent in Phoenix and Las Vegas over the past year alone. Although that's a big blow to homeowners--the housing bust is expected to wipe out more than $2 trillion in home values in 2008--lower prices do help stimulate buyer demand, which is badly needed to mop up the excess housing inventory. And while home prices are expected to drop further in 2009, values in certain markets are already at levels low enough to tempt bargain hunters. "Falling home prices aren't part of the problem, they are part of the solution," says Mike Larson, a real estate analyst at Weiss Research.

3. Fewer housing starts: In the face of dwindling demand, home builders have been forced to sharply pull back on new construction. The government reported Tuesday that November housing starts dropped to their lowest level since 1959, when officials started keeping the statistics. While that's bad news for the economy--because it means fewer jobs for builders and others--it's an important step in bringing housing supply back in line with demand. The cutback will limit the supply of new homes coming into the market, which helps to reduce the glut of unsold homes that is putting such downward pressure on housing prices. "In order to get rid of the inventory, builders have to cut back even further and prices have to drop," Newport says. "It's very painful, but there is no way to get around the fact that that's what you need to do to equilibrate the market."

4. Obama stimulus: In an attempt to hoist the economy out of its rut, President-elect Barack Obama has announced plans for a massive federal spending program. The initiative is expected to put between $500 billion and $1 trillion into infrastructure repair and other projects in an effort to keep Americans working. Should this program succeed in preventing unemployment from skyrocketing and keeping the economic contraction from hitting the dourest projections, certain housing markets may firm up quicker than expected, says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School of Business. In the best-case scenario, "the housing market declines become contained to those markets where house price declines are significant," Wachter says.

5. Credit programs: It will be tough for the housing market to come back to life until the credit markets--which have been log-jammed by fear for more than a year--begin to unlock. Like the fight to limit unemployment, reviving the credit markets is a daunting challenge. But remember, the federal government has already taken a number of steps designed to do just that. The Federal Reserve has slashed its benchmark interest rate to between 0 and 0.25 percent and committed nearly $2 trillion to new lending programs, bailouts, and additional measures designed to bolster the financial markets. Meanwhile, Congress passed a $700 billion bailout and the Treasury has already injected a chunk of that money into banks of all sorts. While these efforts haven't been enough to restore the credit markets to health, they have produced results. Interbank lending, for example, has eased. And should this modest victory lead to a broader recovery in the credit markets, the economy--and the housing demand that comes with growth--could turn around quicker than expected. "Right now, panic is driving the credit markets," says Moody of Mission Residential. "If, for whatever reason, confidence were to resume and people's appetite for risk was starting to increase, then you could start all of a sudden seeing credit flowing much more freely, which obviously supports spending in both business and households."

Instant Analysis of Today’s FOMC Decision

The Fed’s all in and throwing in the kitchen sink for good measure.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability"

Stock and bond markets are celebrating in the wake of an FOMC statement that exceeded nearly all expectations for a substantial easing of policy today. At the time of this writing, the Dow is up about 340 points, and the 10-Yr Treasury yield has plunged to 2.36 percent from 2.50 percent yesterday. Throwing all caution to the wind, the Fed is betting that drastic rate cuts are needed immediately in order to support consumer and business borrowing in the face of a rapidly deteriorating economy and the specter of deflationary forces afoot. Such drastic measures only highlight the scale and scope of the current economic and financial crisis that still lies ahead. The Fed is now pulling nearly all its policy levers and only time will tell if it is pushing on a string, or if monetary policy still has a viable channel in which to operate.

For the first time in its history the Fed has decided to establish a target range for the Fed funds rate of between zero and 0.25 percent, effectively making 0.25 percent its interest rate ceiling. This is also an admission that the Fed has been having trouble maintaining its target as massive injections of about $1.0 trillion into various credit facilities, bank re-capitalization, and the payment of interest on bank reserves make an explicit target nearly impossible to achieve. The movement to a target range also rightly puts the focus of additional policy actions on the scope and scale of outright purchases of MBS, and agency debt. The committee is also exploring the potential benefits of purchasing longer-term Treasury securities as well.

Moreover, the FOMC signaled that they expect to maintain an exceptionally low fed funds rate target of some time. This signal is designed to push longer-term Treasury yields even lower, and from today’s action it seems to have worked.

The FOMC statement begins by describing an economy mired in a deepening recession, with little prospect for near-term relief, stating that labor market conditions have deteriorated, and consumer spending, business investment, and industrial production have declined. The Fed’s view of credit market conditions has not improved, and their outlook for the economy has weakened further.

Finally, the Fed doesn’t mention the prospect of deflation in the statement, but did highlight the prospect for inflation to moderate further in the coming quarters.

Expect further expansion and utilization of the Fed’s existing credit facilities, as well as the addition of new ones in 2009 as the Fed moves further down the path of quantitative easing.


Scott A. Anderson, Ph.D.
Senior Economist
Wells Fargo Economics