By Peter Miller of RealtyTrac
Real estate needs a pick-me-up, something of a surprise considering that home values remain below 2007 prices and mortgage rates continue to hover around 4%. Bargain prices and discount mortgage rates should result in soaring sales but that isn’t the case: Existing home sales trail 2013 levels and sales to first-time buyers are well-below historic norms, a real red flag.
What can we do to perk-up the housing sector? One answer might be help from the Federal Reserve, but as we are about to see any help from the Fed invariably produces both winners and losers.
How low mortgage rates help
In basic terms there are three ways we could boost home sales.
First, we could go back to “affordability loan products” such as option ARMs, interest-only mortgages and no doc loans. In the Dodd-Frank era and after millions of foreclosures that simply isn’t going to happen.
Second, home prices could fall, a nightmare for homeowners and yet declines are already happening in some communities. The National Association of Realtors (NAR)reported that in the second quarter home values grew in 122 major metro markets — and fell in 47 others. For large segments of the country declining real estate prices are here today.
Third, we could have low mortgage rates but — whoops — we already have low mortgage rates. Not quite as low as 2012 when they hit 3.31% but remarkably low by historic standards. How could rates go lower? Less competition for capital would do the trick but that suggests less economic growth and fewer home sales.
Okay, if the three baseline remedies don’t work how about this one: Have the Federal Reserve stimulate the economy and with it the housing market.
“A faster GDP growth rate is the essential step to getting broad-based income growth,” says Freddie Mac. “Unfortunately, the economy can’t perform at its highest level until this happens.”
Translation: Some vast financial power — say the Federal Reserve — should nudge the inflation rate higher and with it housing activity.
And now it seems that the Fed may actually take on that task.
Inflation and real estate
In terms of real estate and mortgages a little inflation is highly desirable. Homeowners want inflation because their homes, as measured in terms of cash, is going up. For borrowers with a fixed-rate loan, inflation means they're repaying the debt with cheaper and cheaper dollars. Buyers want inflation because with it home values are rising and they want to catch the pricing elevator up to benefit. Lastly, as a lender you want inflation because with it equity increases and financially-troubled borrowers can more easily sell properties without setting off the need for a foreclosure.
With the end of its assorted buy-back programs the Fed has now signaled that it too wants inflation back, at least a little inflation. But in the same way that the decision to lower interest rates produced winners and losers, the new decision to embrace inflation will also have fall-out.
A little inflation should elate homeowners because if dollars buy less it should take more dollars to purchase a home, all things being equal. Higher prices and more equity means fewer foreclosures as home values rise above mortgage debts plus there's a greater ability to refinance.
However, if the Fed is successful — and that’s not assured — then with a modest increase in the inflation rate one would expect to see mortgage rates rise. That can’t possibly be good for housing, a sector with flat sales at a time when mortgage rates are skimming the bottom at 4% or so. Higher rates by their nature will freeze some potential home buyers out of the marketplace and thus reduce demand, sales and asking prices.
The real question raised by the Fed’s assorted “easing” programs is whether we should manipulate the economy — and whether we can. The answer is that there will always be efforts to influence economic results. Whether those efforts will be successful is unclear because surely the definition of “success” depends on whether you benefit from intervention or suffer.
Click here to read Peter Miller's full post at RealtyTrac.