November 15, 2007
The state of the economy
An excellent briefing on where things stand from John Williams of the San Francisco Fed. (Thanks, once again, to Mark Thoma at Economist’s View.)
- The housing slump has deepened further. Sales of existing homes fell 8 percent in September and are down 19 percent over the past 12 months. New-home sales rebounded in September, but are still down 23 percent over the past year. Inventories of new and existing homes for sale are at high levels, putting downward pressure on house prices and building.
- House prices in ten metropolitan areas fell on average about 5 percent in the 12 months through August, according to the Case-Shiller Index. Futures contracts on this index imply investors expect house prices in these cities to decline about 8 percent over the next 12 months.
- With demand soft and supply plentiful, housing starts plummeted 10 percent in September, bringing the year-over-year decline to over 30 percent. Housing permits likewise are in a deep descent, falling 7 percent in September and down 26 percent over the past year.
- Despite the bad news in the housing market and the turmoil in financial markets, consumers continued to spend in September. More recent data, however, suggest consumers may be tightening their grips on their pocketbooks. Sales of motor vehicles ticked down in October. Readings of consumer confidence and sentiment have moved down considerably over the past few months. Moreover, the recent surge in energy prices should damp consumption in coming months.
Be sure to open the charts (pdf) and look at the housing data. Scary. (Especially if the peak in prices marks your entry into the market–as in my case, to the month. Bear that in mind when I next dare to make a prediction.)
I also bought in November 2005. However I bought because my family needed a house, one in a nice neighborhood with good schools. This was not an investment, so a 5 to 10 year slump should not be material.
Of course, there are theoretical benefits of waiting to buy– reduced purchase price. However, interest rate increases have eaten into that. Plus lost tax deductions, which can be worth a lot. At any rate, real estate is still a local phenomenon and sales in my zip code have decreased while the price have increased 15% in 2 years.
Finally, if you are leveraged to 95% or so, do not refinance except under the most compelling situation. Definitely do cover it under a first loan with PMI (which has an unfounded bad reputation among Mortgage brokers because they don’t commission PMI). An original first loan is nonrecourse, meaning you can walk away from the house without personal liability. Taking second loans, or refinancing your first, generally eliminates that benefit.
Posted by: Bababooey | November 20th, 2007 at 4:35 pm | Report this comment