What effect may a drop in home prices have on the economy --- Peter (slow)
>> with all the debate about the real strength of the u.s. economy, the strength of one part of it needs no debating, the housing market , helping to keep the recovery on track. with many economists forecasting a slowdown in home sales, peter cook looks at what effect a drop in home prices may have on the economy.
>> fannie mae and freddie mac, nation’s two biggest purchasers of mortgage loans, expect home price gains to slow next year. fannie mae forecast that last year’s home price growth will slow this year to 6.1% and 3.7% next year, below the 20-year average of 4.4%. others agree the slowdown is underway.
>> it would appear that prices have hit a top in terms of the general overall. you’ll still have differentiation among markets where supply is tight but overall, i would expect that prices begin to come in from this point.
>> through mortgage refinancing, homeowners last year turned a record $138 billion of home equity into cash. that extra cash for spending helped keep the u.s. economy on track. some economists are worried about the impact of any slowdown.
>> this is going to be a really big hit to the economy and i don’t think there’s any way around it. i think it’s better that it happen sooner rather than be delayed a couple of years when it will be a bigger hit and more people persony, at the individual level, more people out on a limb by having bought a home at too high a price.
>> other economists are not as worried about a potential housing bubble and believe the housing price slowdown will be gradual and the economy will benefit in the long run.
>> best case scenario is the housing market cools, the economy stays reasonably strong on a recovery track, prices stop going up but don’t fall sharply and the volume declines are modest. i think that’s a great scenario and i think it’s got an even odds chance of being the true one.
>> another wild card is interest rates, which of course have been on the rise. freddie mac, second largest buyer of u.s. home mortgages, however, is not worried.
>> stronger economy will likely push up mortgage rates which will weaken housing demand but the offset is the fact that family incomes will rise, families will feel more financially secure, supplementing housing demand.
>> perspective for you, the median price for a home in san francisco rose 20% over the last year to $650,000. that’s 11 times the median household income. in washington, peter cook, bloomberg news.
>> doug duncan is chief economist at the mortgage bankers association and his group forecasts housing prices will slow but by how much depends on where the federal reserve sends interest rates.
>> a lot of it will depend upon the pace of interest rates and the degree to which they rise. as rates rise, that will cut back slightly on demand for housing and we expect prices to slow moderately.
>> how inelastic is the relationship between mortgage rates and prices? on a basic level, taking out all the complications of principle, on an interest-only loan, a 1% jump in a mortgage rate will mean about $5,000 a year in increase in just interest payments. that seems like a lot of money and it seems like even a 1% gain in overall rates would have a significant impact on prices and demand.
>> the interesting thing is that house holds act on the nominal value of their house, that is the dollar price of their house. if interest rates rise enough to cut back on the demand for housing, such that there’s any threat that house prices will fall, people simply don’t put the house on the market . in the long run, there’s not a close correlation between rising interest rates and house prices falling. since world war ii and probably before that, there’s never been a nationwide decline in average house price. that doesn’t mean local markets haven’t from time to time seen a drop. but nationally, irrespective of whether rates are rising or falling, we’ve not seen on a year-long basis, a decline in house prices.
>> in six months, where’s the average 30-year mortgage, doug?
>> between 6.25 to 6.5.
>> what will keep it that low? the 10-year bond yield staying down or new ways of financing to keep it that low?
>> actually, you can get a good grasp on where the 30-year fixed rate mortgage will be by adding 1.5 5% or 150 basis points to the 10-year treasury yield. right now that’s at about 4.3. if you add 1.5, that puts you at 5.8, where about a 30-year fixed rate mortgage is on the street today. that’s a good measure over time.
>> that was brian sullivan speaking with doug duncan. shares of u.s. airways fell as much as 23% today, ending down 12.75%, 30 cents at $2.05. pilots have turned down the carrier’s proposal to cut pay and benefits, possibly putting it at risk for a second bankruptcy filing. the concessions were part of the airline’s plan to trim expenses. the seventh largest u.s. airline has said it may have to file for chapter 11 if it can’t reach agreements with the unions. fed that i chairman alan greenspan testifies on the economy tomorrow two weeks ahead of the next fed interest rate meeting. is he still committed to raising rates in a measured pace? we’ll look at this with briefing.com’s chief executive economist.
