The U.S. economy undoubtedly is in recession at this time, and the economic contraction will deepen over the balance of this year and into 2009. We’re now looking at an economic setback at least as serious as the episode of the early 1990s, and housing certainly is in the thick of things.
Both the housing sector and the overall economy were weakening
considerably prior to the unprecedented degree of turmoil that erupted in national and global financial markets during October. But the October collapse of the stock market along with the breakdown in major components of the credit markets have put even more downward pressure on housing and the economy. Recent efforts by policymakers to right the situation in financial markets are enjoying only limited success at best.
These developments accentuate the urgent need for another round of economic stimulus from Congress and the administration. It’s now unlikely that our central bank can stabilize the situation in reasonably short order on its own, despite repeated doses of monetary stimulus and a growing list of creative market-making innovations.
Recent surveys of consumers, lenders, and builders all reveal seriously weakening conditions. On the consumer front, major measures of confidence plummeted in October, falling deeply into typical recession territory despite major declines in energy prices for the month. With respect to home buying conditions, the University of Michigan reports that the proportion of consumers saying it’s a good time to buy fell sharply in October, while the proportion saying it’s a bad time to buy rose sharply. The key swing factor in October had to do with worsening conditions in home mortgage markets, although more consumers complained about bad times ahead and fewer viewed low house prices as a positive—presumably because consumers now are projecting falling prices into the future.
The Federal Reserve’s October survey of bank lending officers documents tightening of lending terms and standards in virtually all markets served by depository institutions. In the home mortgage market, large majorities of banks said they had tightened their lending standards on prime, subprime, and nontraditional mortgages (including payment-option and interest-only ARMs as well as alt-A products) during the previous three months. This round of tightening, of course, was layered on top of a systematic tightening process that began toward the end of 2006, and the cumulative process is the most serious on record.
The NAHB’s monthly Housing Market Index, based on surveys of more than 400 single-family builders, sank to a record low in October as builder rankings of buyer traffic, current sales, and six-month sales expectations all fell to record lows. The October survey also showed that record numbers of builders have been cutting prices and offering nonprice sales incentives. However, only small proportions of builders said that such measures were highly effective in bolstering sales or limiting cancellations. With respect to price cuts, nearly half the builders said that recent reductions were “not at all” effective.
The Federal Reserve is likely to lower its target for the federal funds rate to ½ percent before the end of the year, the lowest level on record, and the Fed undoubtedly will continue to pump liquidity into short-term credit markets that need repair—including the commercial paper market. But the Fed may well wind up pushing on a string in its efforts to revive the faltering economy as banks hoard cash and lending volume refuses to expand in critical private sectors such as housing.
Many economic stimulus ideas have surfaced recently, and enactment of a sizable fiscal package is highly likely in the near term. Competition for federal assistance naturally has been intense, but it makes perfect sense to direct some additional assistance toward the housing sector—for the good of both the economy and the financial markets. A well-constructed package including a strong temporary tax incentive for home buying, complemented by sizable buy-downs of mortgage rates and effective limits on foreclosures, would pay handsome dividends in short order.
Learn more about markets featured in this article: Ann Arbor, MI.