Economic Chatter ala Matthew Gardner
Those taking notes at an August 21 meeting, report these opinions of one the region’s leading economists:
- Weak dollar is great for WA – it makes exports cheap and we are the 3rd largest exporter in US
- WA is a business to business provider – will be the last hit with slow down and last to come out. Microsoft is still going gangbusters, Eastside market strong.
- WA has a negative net migration
- Philanthropy in Seattle is huge – employment in this sector has helped to stabilize our area.
- Seattle has the lowest cap rates on apartments
- Economy is cold in Miami, AZ, Las Vegas and parts of So CA. Best places in the country - warm economically - are No Carolina, NY and Washington State.
- Gas may reach $5/gallon next year so home/condo proximity to mass transit will become very important.
- Second home market is down because financing is tough. Down payment requirements for 2nd home has doubled or tripled so it becomes very expensive money.
- Interest rates will go up. Feds to meet in September – they may not move them up in 08 but they are expected to rise in 09.
Thanks for reading our blog.
Fannie Mae & Freddie Mac - Funds Up
Freddie and Fannie Beneficiaries Without real estate loans, there would be little home sale activity. We need activity. Knowing how important the housing industry is to the national economy, the federal government has stepped into make sure loan funds are available to home buyers.
There are two “markets” that supply the funds available for real estate loans: the primary market and the secondary market. The primary market is the local mortgage finance market, made up of banks and savings and loan institutions. The local economy has a significant effect on the amount of funds a local lender has available.
The secondary market is a national market. It consists of private investors and government sponsored agencies that buy and sell mortgages secured by real estate in all parts of the United States. Mortgage loans can be bought and sold just like other investments - stocks or bonds for example.
To help moderate the severity and duration of real estate cycles, the federal government established a strong, nationwide secondary market. The secondary market limits the adverse effects of local economic circumstances on real estate lending.
Local lenders in the primary market are willing to commit themselves to long-term real estate loans even when local funds are scarce, because they can raise more funds by liquidating their loans on the secondary market.
The key government sponsored agencies in the secondary market that buy mortgages are Fannie Mae and Freddie Mac. Both are government chartered and supervised by the federal HUD (Housing and Urban Development). Basically they are organized as private corporations and so have stock.
Investors are willing to buy mortgage loans on the secondary markets, without every meeting the borrowers or seeing the properties, because the secondary market agencies have established uniform underwriting standards. The uniform standards impose a kind of quality control, assuring investors that the loans they’re buying are reasonably safe investments.
The stability of the secondary market took a hit this year. Fannie Mae and Freddie Mac stock prices dropped steeply over the summer. This prompted the federal government to shore up these secondary market giants through an expanded line of credit or an equity infusion in the form of purchases of the companies’ stock.
The new authority is aimed at boosting investment confidence in the companies’ ability to weather the national housing downturn, helping them raise capital and maintain investor interest in their mortgage backed securities.
The Office of Federal Housing Enterprise Oversight, the companies’ regulator, says Fannie and Freddie now have enough capital to withstand extreme conditions.
Good news for the Washington State real estate market and another indicator of a returning market.
Thanks for reading this blog.
Prices Stabilizing
Kenneth R. Harney has some positive observation on the market. He writes on August 26, 2008 in Realty Times:
“The economy continues to send mixed messages — some encouraging for real estate, some not — but this week the positive are edging out the negatives.
“The research company with the largest database of ongoing real estate transactions - First American CoreLogic, which tracks property values in thousands of Zip codes and neighborhoods - reports that nominal price drops have “stabilized” in 883 core-based statistical areas, showing no declines in the past two months.
“Why’s that important? Because flattening out is what we need before we can see a cyclical turnaround — in other words, where even in the hardest hit local markets in California, Florida, Arizona and Nevada, prices have hit bottom.
“They’re not likely to drop much further, and in some parts of California are now at such bargain levels that large investors are prospecting for entire packages of houses — ten or more in some cases — to buy in bulk and rent out.”
Thanks to Mr. Harney. And thank you for reading this blog.
Consumer Spending Will Continue
When asset values fall (read your home), those who own them are poorer, hence they save more and spend less. When wealth increases they save less and spend more.
There is uncertainty about the indirect effects of lowering home prices in the Pacific Northwest. Will consumer spending be held back by the “wealth effect?” Will the Washington State economy be set back, jobs dry up and real estate sales further dampened. Some think not.
Some like Willem Buiter, a former member of the Bank of England’s monetary-policy committee, believe there is no wealth effect from housing at all.
Mr. Buiter’s point is that there is no “wealth” effect from falling home prices, because while there are winners and losers the average consumer is no worse off. A shift in the value of housing does not effect household wealth in the aggregate.
Despite the perception that people flip houses right and left and consider it an investment scheme, most people don’t own houses like that. The average experience is of an owner-occupier who plans to live in his home until he dies. Unless he worries about how much he will leave his heirs, he is indifferent to the value of his home. He will continue to spend as a consumer even if his present market price lowers.
Very often there is too much emphasis on the losers from falling house prices and too little on the winners. A fall in house prices is a boon for those consumers who have yet to buy one.
Young people saving hard for a first property or to buy a bigger home have more license to spend freely when house prices fall.
In Washington State, falling home prices will not be responsible for a drop in consumer spending. Lower prices, unwelcome news for those who expected a continuation of galloping appreciation for their home, will be welcome news for first-time-home buyers.
Thanks for reading this blog. And thanks to The Economist (Aug. 9, 2008)
Housing Economics - A Wide View
Washington State economics resist the downturn in the American housing market. We have continued job growth, less drop in home value, pockets of continued market vitality and, generally, a significant pent up demand for homes in first-time-home buyers. Yet, we cannot divorce ourselves from the national scene so we must appreciate its movements.
For those willing to yield to optimism, there are positive signs.
An over-supply of homes will drive prices down and keep buyers on the sidelines as they wait for prices to “stabilize,” read cease to sink. Optimistic analysis of the national housing pictures indicates supply and demand are moving toward balance. The sink slows to a stop.
According The Economist (August 16th, 2008) sales of new homes, which had plunged nearly 60% from their average level of 2005, have been stable since March. Sales of existing homes stopped falling last autumn. The inventory of unsold homes, though still near recent highs relative to monthly sales has fallen sharply in absolute terms.
By the standards of previous cycles, residential construction should be nearing the bottom.
The Economist suggests that Since home prices have dropped about 18% from their mid-2006 peak (based on S&P/Case-Shiller composite of 20 cities) and incomes have steadily grown, homes are returning to a more typical level of affordability in some regions.
For many buyers in apartments the term home price “stability” is synonymous with “affordability.” They wait for Washington State home prices to cool to meet their budget capabilities.
What about home foreclosures won’t they pull prices down further? Maybe not. Some experts argue that foreclosure sales will impact prices less than commonly thought. They examined state-level data from 1981 to 2007 and found that even large increases in foreclosures have only a small marginal impact on prices, perhaps because they occur late in the cycle when supply of newly built homes is shrinking.
Last month’s housing rescue law offers a tax credit to first-time home buyers a feature that the National Association of Home Builders has been heavily promoting. The law also made the government’s implicit backing of Fannie and Freddie explicit, if necessary by injecting capital into them.
There are positive signs on the national scene that the housing market is coming back into balance, inventories are coming down, prices are returning to “affordability.” It is a process that had to follow the superheated markets of 2005-6.
Thanks for reading this blog. Much appreciated. And thanks to The Economist.
First-Time Home Buyer Tax Credit
Who is Eligible
The tax credit of up to $7,500 is available for first-time home buyers only.
The law defines a first-time home buyer as a buyer who has not owned a home during the past three years.
All U.S. citizens who file taxes are eligible to participate in the program.
Income Limits
Home buyers who file as single or head-of-household taxpayers can claim the full $7,500 credit if their adjusted gross income (AGI) is less than $75,000.
For married couples filing a joint return, the income limit doubles to $150,000.
Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit.
Married couples who earn between $150,000 and $170,000 are eligible to receive a partial first-time home buyer tax credit.
The credit is not available for single taxpayers whose AGI is greater than $95,000 and married couples with an AGI that exceeds $170,000.
Effective Dates for the Tax Credit
First-time home buyers would receive a $7,500 tax credit for the purchase of any home on or after April 9, 2008 (retroactive) and before July 1, 2009. To qualify, you must actually close on the sale of the home during this period.
Tax Credit is Refundable
A refundable credit means that if you pay less than $7,500 in federal income taxes, then the government will write you a check for the difference.
For example, if you owe $5,000 in federal income taxes, you would pay nothing to the IRS and receive a $2,500 payment from the government.
If you are due to receive a $1,000 tax refund from the government, your refund would grow to $8,500 ($1,000 plus $7,500 from the home buyer tax credit).
Buyers can take the tax credit in their 2008 or 2009 tax return.
If you purchased the home in 2008, the tax credit is taken on your 2008 tax return. If you buy in 2009, you have the option of taking the credit on your 2008 or 2009 tax returns.
Types of Homes that Qualify for the Tax Credit
All homes, whether single-family, town homes or condominium apartments will qualify, provided that the home will be used as a principal residence and the buyer has not owned a home in the prior three years. This also includes newly-constructed homes.
Payback Provisions
The tax credit essentially serves as an interest-free loan to be repaid over 15 years.
For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. If the home owner sold the home, then the remaining credit would be due from the profit of the home sale.
If there was insufficient profit, then the remaining credit payback would be forgiven.
Full credit to Windermere’s Marketing Department for this Fact Sheet. The art work, however, is ours.
