Real Estate Outlook: Inflation to Lessen

by Kenneth R. Harney

When it comes to today's marketplace, take your pick: You can focus on the economy's bright spots -- mortgage rates and rising sales in scattered local markets -- are tops on the list at the moment.

Or you can focus on the dark side: Gas and food prices through the roof, consumer confidence in the pits, and the real possibility that we're looking at a "growth recession," where the overall economy crawls along but not fast enough to generate significant new employment.

No question all of those factors are at work at the moment. But for real estate, the critical factors may well be mortgage rates and a new federal tax credit program for first-time home buyers -- $4,000 for singles and $8,000 for married couples -- that could be operational within weeks.

Mortgage rates have come down for a couple of important reasons:

First, the Federal Reserve, in its latest policy statement, emphasized that it expects inflation to lessen in the coming months. The capital markets interpreted that as a sign the Fed won't be raising short-term rates anytime soon.

Recent stock market jitters about banks and other major financial institutions also have triggered a "flight to quality" to ultra safe bond investments. The safest of all, of course, is Treasury securities, and inflows of capital into 10-year Treasury bonds -- which are used to price mortgages -- have helped cut interest rates for home buyers.

According to the Mortgage Bankers Association of America's survey last week, 30-year fixed rate loans averaged 6.35 percent -- down from 6.5 percent the week before and 6.6 percent a year ago.

Fifteen year fixed rates hit 5.9 percent, also down from the prior week.

But even with these favorable financing developments, we're still in the woods in terms of overcoming consumer confidence fears. That was clear this past Tuesday, when the latest pending home sale index dropped 4.7 percent for May after an upwardly-revised number for April.

Although Dr. Lawrence Yun, chief economist for the National Association of Realtors, said some pullback from April's high was anticipated, the best scenario he sees for the coming months is a slow, modest upward trend in sales on a national basis.

The outlook is very different in dozens of local markets, however: The latest index recorded double digit jumps in pending sales in places like Colorado Springs, hard-hit Sacramento, California and parts of the Carolinas.

So it could be the long-awaited housing recovery will be very locally focused to start, then spread more widely.

We'll keep you posted.

Published: July 10, 2008