Economist's Commentary: September 17, 2008

Quick Take on the Economy: September 17, 2008

By Lawrence Yun, NAR Chief Economist

No government help was provided to Lehman Brothers, but the government last night came to the rescue for the insurance giant AIG with a massive loan package. Significant stock ownership by the government would dilute the value of AIG stocks so the owners of the company are getting punished.
An AIG collapse would have triggered a cascading collapse of other important financial players. AIG provided default insurance on mortgage debt. This obligation would go unpaid if AIG fell.
A corollary example would be if your auto insurance company did not pay upon an event occurrence because the company did not have money. Imagine not only the anger, but the run on the company by consumers for their money back, and the absolute panic in the market.

New home construction fell in August to 895,000 (seasonally adjusted annualized pace) from 954,000 the month prior and from about 2 million pace during the housing boom years in 2004 and 2005.
Starts on both the single-family and multifamily units fell. Housing permit issuance also fell markedly in the latest month. This portends further cutback of new home construction activity in the months ahead.
Homebuilders are getting squeezed hard from lack of business. However, this is a necessary proper adjustment to trim housing inventory. Builders need to make even sharper cuts.
Less construction means fewer workers in the industry. Therefore, GDP growth forecasts are notched down.

The vacant new homes have been an albatross forcing many home sellers to deeply cut prices in order to attract buyers. Sellers of existing homes will have less competition from builders as we move into 2009.
Fewer new home inventories will better help stabilize home prices.
A weakening economy means higher unemployment rate. However, those with a job - and that is about 94 percent of the labor force - are likely to see a more favorable mortgage rate conditions.

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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