Housing prices fell 18% in October
According to the Case-Shiller index. Analysts think this will put pressure on the government to do something:
The latest Case-Shiller numbers provide more ammunition to Washington policy makers who want to do more to fix the housing mess, according to Jaret Seiberg, an analyst with the Stanford Group, the policy research firm.
"These data just add to the tremendous pressure on the president-elect and the Democrats to stimulate housing," he said. "That means more lucrative tax incentives and broad foreclosure prevention. All of this will likely be in the stimulus plan that Congress adopts in January."
Nicholas Retsinas, Director of Harvard University's Joint Center for Housing Studies, agrees. "Housing problems are at the core of our economic problems," he said, "yet, of the government interventions made during 2008, few were focused on housing."With a new administration and Congress in place next month, he expects to see a renewed interest in stabilizing the housing market.
Stabilize how? Give people a ton of money to prevent foreclosure and nifty tax breaks to make their mortgages more affordable. What then? There will still be no buyers, because lending standards just got a whole lot higher--like, 15% down and sterling credit higher, as the article itself points out:
And although interest rates are currently extremely low - the 30-year fixed-rate averaged 5.14% during the week of December 24, according to mortgage giant Freddie Mac (FRE, Fortune 500) - that's doing more to help people refinancing existing mortgages than it is to help new home buyers.
"Buyers still have to have a 20% down payment," said Newport, "and, in this environment, it can be hard to meet that criteria."
An 18% fall in house prices lowers mortgage payments a lot more than a similar fall in interest rates. As long as the rent-to-buy calculation remains out of whack--and for most people, it still is--new buyers won't be coming on the market. Besides, the lower the interest rate is already, the harder it is to generate new interest by lowering it. A 20% drop in a 9% mortgage rate saves the buyer 1.8% of the price of the house every year; a 20% drop in a 5% mortgage, only a little more than half that. With ARM rates low, the problem with mortgages is that the principal is too big, not that the interest rates have shot too high.
The housing bubble produced spectacular overbuilding. The only way those houses can be sold is to lure new buyers into the market--which, for the reasons outlined above, is better accomplished by lowering the principal, not the interest rate. The alternative is to keep prices high, but make markets illiquid--you don't have to take a lower price for your house, but it takes you a long, mortgage-paying year to sell it. This is not an improvement.