As someone who has been in and around the housing and mortgage servicing industries for as long as I have, I am always on the lookout for articles and other information that discuss the condition of the economy in general and the housing market in particular. Not being shy to enter a debate on these subjects, I was interested to read a recent article published in Scotsman’s Guide, “As home values moderate, fears of bubble deflate” -- Catchy, if not inaccurate.
The reason this article caught my eye is that in it, Zillow (Z) economists are quoted as saying the recent slowdown in home prices might actually be good for homebuyers, steering the market away from a bubble. Interesting, given that the recent announcement by the Federal Open Market Committee that they had ended bond purchases, effectively ends quantitative easing, which means interest rates will no doubt soon be rising. Many economists and housing analysts agree that a rise in interest rates will negatively impact the economy, particularly with respect to the housing sector. This will hardly be good for homebuyers.
In the Scotsman Guide article, Zillow Chief Economist, Stan Humphries, is quoted as saying, “We always knew these market conditions [rapidly rising prices] couldn’t last, and it’s good to see us now on a more natural and sustained glide path down toward more normal market conditions of roughly 3 percent annual appreciation.”
But Mr. Humphries’ comment presupposes that prices will only decline so much, and doesn’t take into consideration that in some markets prices just might decrease into negative territory. This very potential was proffered by a recent home value analysis by Clear Capital warning that home prices might decrease enough to head into negative territory, which would put some homeowners underwater once again. This is certainly not a “good thing.”
Decreasing sales of bank-owned, distressed properties is an indication that many investors, especially institutional investors who played a key role in helping to artificially push home prices upward, are leaving the market. This means that ordinary homebuyers would need to actively participate in the housing market. This will be complicated if, as other analysts and I believe, that interest rates will begin to rise early in 2015.
To some, the Fed’s announcement supposedly reflects how much the economy has improved, but to me it confirms the belief that interest rates will soon begin to rise -- after Election Day, of course (What a coincidence). The reality is that there are signs that the economy has showed some improvement. But there are many more signs pointing to a worsening economy in the months ahead.
Affordability issues, looming interest rate hikes (as have also been predicted publicly by Federal Reserve Chairman Janet Yellen and others), too many FHA loans being made, federal emphasis being placed on low-income borrowers (as seen in the recent push by the FHFA to have Fannie Mae loosen underwriting guidelines), and other factors are also causing house prices to decline in many markets.
More importantly, rising interest rates, which has already begun, albeit only slightly, is only one factor that points to a further downturn in the housing market. In addition to the indicators mentioned above, the continued lackluster creation of meaningful, well-paying jobs in this country will continue to dog economic conditions, just as it has throughout the past six years. This cannot be stressed enough. There has been far too much weight placed on reports of lower unemployment numbers and not enough emphasis placed on the reasons for them, including the number of part-time jobs filled and the vast number of people who have given up looking for any job.
There is no mystery as to how to get our economic engine revved up and humming again. Can you say, “Capitalism?”
Maybe, just maybe (although I am not holding my breath), a change in the balance of power in the House and Senate will result in the federal government once and for all stepping aside and allowing the private sector to correct what ails this great nation economically.