What's not so good for the goose may be good for the gander, as home sales continue to rock the economy, but poor recent news from home builders could benefit sellers of existing homes.
Housing starts, that metric put out by the National Association of Home Builders that means that homes are beginning construction, plunged in October to a six-year low. With starts dropping 14.6 percent, that's the lowest level since July 2000. Building permits were down 6.3 percent -- the lowest rate in nine years.
As dire as that sounds, the advantage that home builders have is that they can concentrate on eliminating standing inventory, many times by offering terrific incentives to homebuyers. When builders offer incentives, that's usually bad for existing home sellers because it's hard to compete with an all-new home with a free pool, landscaping or other upgrades thrown in.
Unlike homes that must be started, built and completed, existing homeowners can enter the market with a phone call to a broker, so having fewer new homes to compete with is desirable, especially when homebuying is sweetened with falling interest rates.
Following the home builders announcement of falling starts, mortgage rates quickly dropped to the lowest level since Jan. 25, with the average 30-year fixed rate hovering at 6.24 percent. According to Bankrate.com's weekly national survey of large lenders, bankers believe that inflation pressures may be easing. Comments from Federal Reserve Board members have recently downplayed "the likelihood of further interest rate hikes" and that helped push mortgage rates lower. However, many economists continue to believe that the FED will not lower short term interest rates in the near future.
With fixed mortgage rates are sharply lower than five months ago, when rates were near 7 percent, homebuyers have the opportunity to get into a home without as much risk if they can qualify.
Both the National Association of Realtors and the National Association of Home Builders suggest that now is a great time to buy. As the NAHB explains it, "Thanks to the concept of “leveraging,” purchasing a home is by far the best long-term investment. Leveraging means putting down a small amount of money to earn a big return.
"For example, say you use that $10,000 to purchase a $150,000 home, and the house appreciates five percent during the first year. That means after one year, the house would be worth $157,500 -- a gain of $7,500. Your annual return on your $10,000 investment would be a whopping 75 percent.
"By contrast, putting the same $10,000 in the stock market and posting a similar 5 percent gain would only net a $500 return on investment.
"And as a home owner, your savings continue to grow in two ways. Every year, a greater portion of your monthly mortgage payment goes to the principal, reducing the overall loan amount. Second, your home appreciates over time, making it one of the very best financial investments. Not only is homeownership a stepping stone to a future of financial security, it also helps to build neighborhoods and strengthen communities. It is truly the cornerstone of the American way of life, and the fulfillment of the American dream."
However, the open window may shut soon if buyers pile back into the market, scarfing up standing new home inventory as well as existing homes for sale. That could quickly reignite starts which will in turn reignite interest rates.
Meanwhile, sellers may experience a better-than-usual seasonally adjusted holiday selling season.
And that's something to say thank you for at Thanksgiving dinner this week.
