Weekly Economic Update- June 27, 2007

The consensus among economic analysts seems to be that the real estate market is going to suffer further slowing–and price declines–between now and mid to late 2008. Trouble is, these same analysts have been consistently wrong about this slowdown. It is a real estate market–and an overall economy–that resists generalizations. There are parts of the market and localities that are in the process of repair–loans being restructured and prices stalling while incomes catch up with them, for example. There are also parts of the market and localities that are still experiencing strong sales and even a bit of price appreciation.

This is not to minimize how much slower many markets are…but it’s worth noticing that there is still demand for the right home at the right price, and that 87% of the subprime mortgages that have been written are performing very well for borrowers and investors.

We are in the midst of, not at the end of, a very unusual correction. But the world is not caving in, and there is no way of being certain that “things can only get worse” in the months to come.

The only real certainty is that, as with all corrections, things WILL get better, and relatively soon. Meantime, take this opportunity to strengthen your own market share.

Thumbnail Sketch: The sales numbers are worrisome.

Sales of existing homes were down by 0.3% in May. (This is closed sales, not initial contracts, so this figure is more historical than predictive.) The decline is not as worrisome as the rise in the number of homes available for sale. According to the National Association of Realtors®, it would take 8.9 months for all homes currently on the market to sell at today’s pace of sales.

This indicates the largest inventory on the market yet in this downward cycle. For condos, the figure is 9.7 months. With so many homes available for sale, the likelihood of a positive appreciation rate for the time being is very slim. And indeed, the nation’s median home price is down by 2.1% since this time last year.

Census Bureau data on new home sales offered, if anything, only slightly more optimism. New home sales declined by only 1.6%, but sales figures for March and April were revised downward. The number of homes on the market rose slightly to 7.1 months’ worth; the 2006 average was 6.4 months’ worth of homes. The good news here is that 7.1 months is smaller than the 7.9 months average in the first quarter of this year-and the number of sales was significantly higher in May than in the first quarter.

This week’s FOMC meeting-to determine whether to raise or lower the fed funds rate-will look at these facts, of course, but will almost certainly decide to leave the fed funds rate exactly where it is, issuing a statement that shows concern for possibly rising inflation, a tightening jobs market, and generally positive economic growth. The data on jobs, for months quite positive, is crucial here. Recent applications for unemployment insurance, though, have shown a slight upward trend that deserves our close attention, but is unlikely to worry the Fed enough to start a downward movement for short-term rates.

As you have doubtless noticed, long-term interest rates have been rising to exceed slightly short-term interest rates, bringing an end to the season of the inverted yield curve. What this tells us is that more order and confidence are finding their way into the financial markets. I am not as inclined toward confidence as of yet, but recent economic indicators seem to suggest that we’re easing into a mildly strong season…and even real estate sales should improve a bit. A look at the huge available inventory, though, tempers my optimism.

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