Economist's Commentary: October 8, 2008

Quick Take on the Economy: October 8, 2008

By Lawrence Yun, NAR Chief Economist

The PHS Index released today shows a very nice gain of 7.4 percent from the month prior and 8.8 percent from one year ago.
It implies that closed existing home sales in September, which will be reported in couple of weeks, will show gains.
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The Federal Reserve lowered the fed funds rate by 50 basis points. The short-term lending rate is now 1.5 percent. It had been as high as 5.25 percent as recently as August of 2007.
Central banks of several other major industrialized countries also made a similar cut. The reason for the coordinated cuts is that all countries are facing essentially the same problem of holding on the troubled mortgage loans that are preventing the normal functioning of credit markets.
Rate cuts are partly justified in light of a notable drop in oil prices, which will lower inflationary pressures. Also the coordinated cuts assure that the dollar retains its value. A sole U.S. rate cut will have weakened the dollar and raised the price of oil and other commodities.
If the stock market continues to weaken and credit markets continue to hemorrhage then there could be another fed funds rate cut at the end of the month.
Rate cuts, however, may not lower long-term interest rates like mortgage rates. It is possible for mortgage rates to rise if inflation picks up.

Mortgage applications for a home purchase rose in the last week after having fallen in the two previous weeks. But the reliability of this data in predicting home sales and about mortgage approvals is unclear.
Mortgage applications for a home purchase fell in July and August, yet pending home sales rose solidly in August.
Refinancing mortgage applications were little changed from last week. Current activity is higher compared to August but much lower compared to September.

A global economic recession is here. But the depth of the downfall will depend on when and how the U.S. housing market recovers.
Rising pending home sales is a very positive sign. More buyers will trim inventory. Lower inventory in turn will help stabilize home prices. Once home prices begin to rise, the value of the mortgage-backed securities will also rise, thereby ending the global credit crunch.
Some homebuyers are eagerly taking advantage of falling home prices and historically favorable mortgage rates. More buyers could soon mean the end of price declines.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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