30-Year fixed mortgage rates dropped 80 basis points in December to 5.26% and fell further to near 5% at the beginning of January. At best a marginal positive impact on home buying will come from this. Mortgage refinancing applications soared to back near the peak 2003 level, rising about five-fold. Homeowners are lowering their monthly payments which will provide a small offset to the negative impact of declining incomes and confidence on consumer spending.

Prospective home buyers are still waiting for the bottom in prices in most large housing markets. The latest data (October) show an acceleration in price declines but this is likely temporary. It is the same shock impact from the abrupt worsening of the recession that appeared in most economic data for October. The bottom for prices is still many months ahead in the large housing markets.

The National Association of Realtors reports that 45% of current home purchases are “distress” sales, mostly foreclosures or sales to avoid foreclosures. Homebuilders can not compete with a huge inventory of distressed existing homes in the major housing markets. So new home sales are now limited to distress sales of homebuilders’ inventory, custom homes and a small number of homes in smaller, stable housing markets that escaped the boom-bust market in 2004-08.

Home affordability continues to improve and is now at a near record high level. But his positive is trumped by low and still declining consumer confidence and the loss of credit access to household groups that bought the majority of new homes at the end of the housing boom.

Prospective home buyers need some good news. It will not come from the housing market or economic reports for many months. But it may come from Washington. Although Obama appears to have abandoned earlier plans to directly subsidize home-buying and foreclosure prevention, quick enactment of tax cuts and infrastructure spending could lead to rising consumer confidence within a few months.

The housing recession is now entering the fourth year. Increasingly builders are running out of reserves or credit to wait for a market recovery. Expect a surge in builders ceasing operations in 2009.

Housing Market Monitor — November 2008

Abbreviations: NAR = National Association of Realtors; NAHB = National Association of Home Builders;
FHFA = Federal Housing Finance Administration
Table: Reed Construction Data and Reed Construction Data – CanaData.