Following the National Association of Builders release of its monthly Builder Confidence Survey, which blamed mortgage interest rates and a glut of housing inventory for the poor showing in builder confidence, Federal Reserve Chairman Ben Bernanke eliminated hope that short term interest rates might be cut.
Short-term interest rates are the rates at which banks borrow money and then they turn around and loan the money at higher rates to corporations and consumers. With mortgage interest rates rising, housing inventories are less likely to be reduced without major concessions from the builders such as price reductions and free upgrades. Further, higher mortgage interest rates, coupled with higher qualification standards set in the wake of the subprime meltdown have eliminated many first-time homebuyers, which in turn, keeps move-up buyers from being able to trade up.
Under those conditions, builders' confidence hit its lowest record since January 1991. The builders' confidence index was 24 in June, 39 a year ago, and 72 in June 2005. Any number over 50 is considered optimistic, so the index has fallen significantly.
The problem is that comparisons to the building recession of the early nineties are becoming more frequent, even though the circumstances aren't quite the same. For one thing, the run-up in 2001-2005 was steeper than the 80s housing boom, primarily because homebuyers had more liquidity due to relaxed lending standards and government subsidies such as tax breaks on homestead capital gains that weren't available two decades ago.
Boomers were buying their first homes in the 1980s and are still in control of the market today with moveup, retirement, investment and vacation properties. Homebuilding and homebuying were both somewhat speculative by the time boom turned cool in 2005.
But the main difference is that mortgage interest rates dropped during the 90s housing recession. During the present recession, interest rates are rising, which is like putting out a fire with gasoline.
For those reasons, some think the housing recession will be harder and last longer than it did in the 1990s, a concept that makes homebuyers even more reluctant to pony up.
Real estate investor and newsletter writer Robert Campbell says his crash index suggests that Southern California housing prices are likely to fall for another three to six months. "Record low affordability, rising interest rates, record levels of appreciation, significant credit tightening in mortgage lending, record use of leverage, and the coming tidal wave of ARM resets threaten to make the current real estate down cycle a record bust that will be more painful and more devastating than the last," writes Campbell.
The builders followed their 10-year-low confidence report with the news that while starts were up to an annual rate of 1.47 million homes, permits were down to a 1.41 million pace. Permits are regarded as an important gauge on the future of homebuilding.
This suggests that builders still have standing inventory to sell and more discounts, upgrades and other incentives to offer. In turn, lower new home prices impact the prices homeowners can charge for their homes.
But as negatively as the housing industry may view the near future, Federal Reserve Chairman Ben Bernanke believes that the economy will continue to expand, although somewhat more slowly with the housing industry weighing down sales. In his testimony before Congress Wednesday, Bernanke said, "Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend."
But that's if the housing slump doesn't last longer than anticipated. Noting the building slump, he also said, "To a considerable degree, the slower pace of economic growth in recent quarters reflects the ongoing adjustment in the housing sector."
He said that he expected economic growth to be in the 2.25 to 2.50 percent range, a quarter point lower than last estimated.
