Economist's Commentary: September 30, 2008

Quick Take on the Economy: September 30, 2008

By Lawrence Yun, NAR Chief Economist

Congressional NO vote

• The House of Representative voted down the bill that would have allowed the Treasury to buy up troubled loans from financial institutions so as to unclog the credit pipeline.
• Unless the measure is taken up again this Thursday, alternative solutions must be found to help revive the financial system and the housing market.
• A re-vote with some modifications is possible for this Thursday.

Other Policy Options

• If another no vote occurs, then other options must be considered to help the financial system and the economy. Options to consider are the following:
  • Federal Reserve cuts short-term rates, but this will not help bring down mortgage rates given inflationary concerns.
  • Raise FDIC insurance from $100,000 to something greater to prevent bank runs. Coverage needs to be expanded to non-bank deposits and even to new money market account deposits. A bank run is unlikely but it is wise to protect depositor confidence against any negative financial shock.
  • Case-by-case help or no-help as happened with Bear Stearns, AIG, and Lehman Brothers. This is inefficient and even unfair as to who gets help and who doesn't. This also creates unnecessary uncertainty, but this option will have to be used.
  • The Federal Reserve engages more actively in term-auction security to provide liquidity as needed.
  • Make homebuyer tax credit clean without the repayment feature. The recently enacted $7,500 credit is less effective because of the repayment.
  • Remove the capital gain tax from a sale of a second home. For a primary residence there is a large exemption. But many investor and vacation homes are subject to capital gains tax. A removal will raise home values. A higher home price will boost the value of mortgage-backed securities and lower foreclosure rates (The stock market will also make a large upward jump .

Case-Shiller Price Index

• Case-Shiller price data in the recent past have been influenced heavily by subprime loan distressed sale properties. The data is for July and a bit old. It is still instructive to assess the trend.
• The 20-city price index fell by 16.3 percent from one year ago, but the pace of decline has been slowing, suggesting the price declines could soon end. The monthly decline, which had been 2 to 3 percent in late 2007 and early 2008, has been less than one percent in each of the recent three months.
• Home prices have been rising for four straight months in Boston, Dallas, and Denver. Atlanta and Minneapolis experienced price gains for three straight months. All real estate is local and some markets have evidently already turned the corner.
• Price declines are occurring in areas with high foreclosures and capturing the distress values of these sold properties in Las Vegas, LA, San Diego, San Francisco, and Miami.

What does today's data mean for REALTORS® and consumers?

• The economy will likely go into a recession without the package. Depending upon how other policy options are used, it could be a mild or sharp recession.
• Home price declines have been slowing, with some market showing gains. All real estate is local so check your local conditions.

Daily Forecast Update

• NAR's monthly official forecast as of September 9th (15K PDF)
• GDP Q3: 0.4%
• GDP Q4: -0.3%
• Unemployment rate at year end: 6.5%
• Average 30-year fixed mortgage rate in December: 6.1%
• Average 30-year fixed mortgage rate by mid-2009: 6.5%
• The next Fed policy change: a rate hike in the fourth quarter of 2009.

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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