Article_-_Housing_Bubble_Commentary

Article_-_Housing_Bubble_Commentary - Economist's...

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Unformatted text preview: Economist's Commentary: February 19, 2008 Refueling the Housing Bubble? By NAR Chief Economist Lawrence Yun The Federal Reserve has been aggressively cutting rates recently and the question is being raised about parallels to the past. Back in 2001, in the aftermath of the internet stock bubble collapse and the September 11 terrorist attacks, Alan Greenspan then the Fed chairman made deep cuts in interest rates in order to stave off a possible economic recession. Many also blame Mr. Greenspan for having fueled the housing market bubble and subsequent collapse by keeping the rates too low for too long. Now in early 2008, with the economy possibly heading into a recession as evidenced by the GDP growth rate slowing from 4.1% in third quarter to 0.6% in the fourth quarter the current Fed Chair, Ben Bernanke, has been following a very similar step of sharply cutting fed funds rates in order to revive economic growth partly by making home buying financially enticing. Though there is never a direct correction between the Fed funds rate and mortgage rates, which are outside of the Fed's control and determined by the global bond market, the current 30-year mortgage rates have come down to essentially 45-year low levels. Aside from a few months in 2003, mortgage rates have never been this low since the early 1960s. A drop in the average mortgage rate from nearly 7% in mid-2005 to the current 5.7% would reduce monthly mortgage payments from $1330 to $1160 on a $200,000 mortgage. The average savings would be $340 per month or $4,000 per year on a $400,000 mortgage. Therefore, could the Fed be simply refueling the bubble by dangling financial incentives to buy a home? Well, let's replay the key factors related to the recent bubble-collapse and see whether the same behavioral patterns will reemerge. Keep in mind that there are significant local market variations, but the markets that had the huge swings followed the below pattern: The Fed started cutting rates from 2001 with the Fed funds rate eventually reaching 1% by mid-2003. The mortgage rate fell to 5.5% by the summer of 2003 from 8% in 2000. ARMS rates fell from 7% to 3.5% over the same period. Housing demand rose with existing and new home sales hitting successive high marks in 2003, 2004, and 2005. Inventory fell as a result. Home prices accelerated. For example, in the D.C. region home prices more than doubled from $204,000 to $426,000 from 2001 to 2005. Homeowners' net worth leapt by over $200,000 as a result a figure many would considered good lifetime savings. Given the general weakness in the stock market and relative "easy" wealth gains for real estate owners there was an increasing view of homeownership and real estate as a financial play rather than in terms of family and housing needs considerations....
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Article_-_Housing_Bubble_Commentary - Economist's...

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