Shrinking Inventory May Indicate Housing Recovery Start

The national home supply is falling, down to its lowest levels since December 2008.

In June, there was 9.4 months of supply, down from a year-ago level of 11.0 months. It's one more sign that the housing market may be mending itself.

Housing supply is an important metric because home values across every U.S. market are rooted in Supply and Demand. When the supply of available homes outpaces buyer demand, home values tend to fall. And, by contrast, when homes are relatively scarce, values tend to rise.

We're still a long way from historical averages, but dwindling home inventory may be one reason why the national median sale price rose by $7,000 last month.

A reduction in inventory may also explain why two other popular home value metrics -- the government's Home Price Index and the private-sector's Case-Shiller Index -- are each showing signs of a rebound, too.

However, before we get too excited, it's important to remember that home sales of late have been spurred by low mortgage rates and by the First-Time Home Buyer Tax Credit. A real estate trade group says first-timers represent 29 percent of the market, for example.

But so long as rates remain low and buyer stimulus is in place, we can expect that the recent trends in real estate will continue. Inventory should continue to drop and prices should start to rise. And in a market like Philadelphia, where our inventory was not as large as some of the hard hit areas around the country, this may be even more significant. It would seem that for most home buyers, especially first time home buyers, now is certainly the time to act.

Therefore, if you're planning to buy a home in the next 12 months, buying sooner rather than later may be a smart way to save on your next home.

Can You Buy More House Because of Higher Unemployment?

Last week's jobs report is the latest data point to drag down rates for today's home buyers and would-be refinancers.

As reported by the government, the national Unemployment Rate rose to 9.5 percent in June -- a 25-year high.

As the percentage of out-of-work Americans grows, households have less disposable income to pump back into the economy.

And so, because consumer spending accounts for two-third of the economy, the growing ranks of the unemployed are forcing markets to change expectations about when the U.S. economy will reach its full recovery.

Inflation is the enemy of mortgage rates. The perceived absence of inflation, therefore, can be its friend.

With fewer working Americans, we can expect slower economic growth plus a smaller probability for inflation over the medium-term. This is why mortgage rates are lower of late, off by as much as a half-percent from the peak.

Home affordability is up. And in a market like Philadelphia where prices have remained typically affordable, that may account for the additional activity we are seeing this summer as home buyers work towards attaining future security for their families through home ownership.

So if affordability is up, should you be looking to see what might be in your best interest?

The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged yesterday, within the target range of 0.000-0.250 percent. This doesn't mean the Fed stood pat, however.

On plan to resurrect the economy using "all available tools", today, the Fed announced a new, $1.5 trillion round of fiscal support for the treasury and mortgage markets.

The stimulus will likely be this morning's headline story.

In its press release, the FOMC touched upon a few of the prevailing economic issues, using these points as a legitimizing backdrop for its newest debt load:

• Job losses and wealth loss are dragging down consumer spending
• Some U.S. trading partners are falling into recession
• Businesses are cutting back on investment and inventory

Of interest is that the FOMC said today's inflation levels may be too low to support economic growth at all. This condition is more commonly called deflation. The Fed's latest actions, therefore, may be a deliberate attempt to induce inflation through unprecedented borrowing.

For home buyers and potential refinancers, this is terrific news -- at least in the short-term. By introducing new demand for mortgage bonds, the Fed will help pressure mortgage rates lower. Already this afternoon, mortgage rates fell and they will continue to fall until the market reaches a new equlibrium.

After the Fed's last intervention, markets reached their balance point in about a day-and-a-half.

For people who have been indecisive about whether to buy or not now, this is another indicator that the market has reached the optimal time to act.

Source
Parsing the Fed Statement
The Wall Street Journal Online
March 18, 2009
https://online.wsj.com/public/resources/documents/info-fedparse0903.html

Existing Housing Sales Stable!

In real estate, the term existing home refers to a "used" property; one that can't be classified as new construction.

The number of existing homes sold each month is tracked by the National Association of REALTORS. The report is often used as a gauge for the health of the real estate market nationwide.

In October, nearly 5 million existing homes sold across the U.S. This figure represents a slight drop from September's reading, and a equally slight drop from the October 2007 data.

But, October's Existing Home Sales figures marked the 14th straight month in which Existing Home Sales straddled 5-million units. This is a remarkable statistic because 14 months of anything is a pattern, not a blip. Despite what the news tells us, Americans are buying and selling real estate at a somewhat steady clip.

In Philadelphia, our real estate market has seen some decline in the number of homes sold through the MLS this year, but a remarkable stability in price. Combined with the affordable interest rates available to buyers to day, our city is poised (according to Smart Money Magazine) for a housing recovery. Smart buyers who can should be out there buying right now.

As we head into the Holiday Season, buyer activity should slow, reducing demand for homes. At the same time, however, widespread foreclosure moratoriums should reduce the number of homes available to buy. These forces should counter-act to help keep the market (and prices) in balance.

(Image courtesy: USA Today)

Deflation and What it Means -

Business television and newspapers have made deflation a hot topic this week and, since Monday, Google has tracked 13,000 mentions of it.

Deflation is a recurring cycle in which the prices of goods and services fall. Isolated to one industry or sector, falling prices is the natural result of competition.

For example, when DVD players were first introduced, they were tagged at $800.

Today, you can buy them for less than $20.

Across many industries, however, and happening at the same time, falling prices can shut down the economy. Rather than buy things on the cheap, people stop buying anything at all. And why would they? The same items will cost less tomorrow.

And this is the problem with deflation -- it halts consumer spending and consumer spending makes up two-thirds of the U.S. economy. When it stops, the economic result is dwindling corporate revenues which leads to:

1. Layoffs of the workforce, which leads to...
2. Less consumer spending, which leads to...
3. Dwindling corporate revenues, which leads to...

And the spiral continues.

Deflation can be much more insidious that its expansionary counterpart -- inflation. Inflation is when the prices generally rise over time and it's an economic condition through which governments can comfortably navigate. Deflation, on the other hand, is more rare and, therefore, fewer practical control measures exist.

Whether the U.S. economy will slip into deflation is a matter of debate.

The Fed has cut the Fed Funds Rate to promote economic growth and those changes can take up to 12 months to work their way through the economy. Deflationary pressures we're seeing today, in other words, may have already been addressed and corrected by Ben Bernanke's 10 rate cuts in the last 14 months.

Until the market figures it out, though, expect that each mention of deflation will hurt the stock market and help the bond market -- including the mortgage-backed variety. This should help lower mortgage rates and make homes more affordable.

(Image courtesy: The Wall Street Journal)