Weekly Economic Update- July 11, 2007

The real estate market continues at a steady pace, perhaps slower than many real estate professionals would like, but nevertheless steady. New home sales seem to be fairing better than existing home sales because builders tend to have more strategic marketing in slow markets than existing home owners.

Perhaps the existing homes market would improve somewhat if private sellers studied what is working fairly well for new home builders.

Thumbnail Sketch: We can sense a trend now. Mortgage rates are gradually rising. The number of new applications for purchase money mortgages remains relatively strong, though the multiple applications from most prospective homebuyers inflates the number of expected sales. New home sales continue to fare better, generally, than do sales of existing homes.

Let’s look at a couple of these aspects of the market a little more closely.

It is actually somewhat amazing to this observer that the Fed has remained so concerned about the possibility that inflation would rise-but it has (at least, in its public pronouncements). There is a general belief that the economy will continue to grow at an adequately rapid pace, despite the slowing of the real estate market. So far, this seems to be true. It is difficult, though, to be confident of this unless the real estate market remains fairly warm.

In the context of this belief, however, it makes sense for interest rates to climb gradually out of the deep lows they recently experienced…back to more “normal” levels. (This is all a matter of perception, of course. Bill Gross, the bond market guru, seems to be certain that the Fed will lower the fed funds rate within the coming six months, as the subprime mortgage problems continue to erode both the real estate market and overall credit quality.)

What we have to the left, in any case, are the average interest rates on mortgage loans currently being originated. It is worth reminding you that these are almost always higher than the best available rates, which are published by bankrate.com and other sources. The average rates, published by HSH Assoc., tend to be a better initial guide to the current market for potential borrowers, because they may be able to do better, whereas with the best available rates, they are very likely to face higher rates for their own loans.

As for the better sales performance from new homes than from existing homes, the fact is that builders tend to have better promotional techniques at hand for a market like this. They can offer to pay the buyer’s points, to help the buyer sell his or her own home, to throw in landscaping or carpeting for free. Notice, though, that private homesellers can do many of these things, including interest rate buydowns for their buyers. Perhaps the existing homes market would improve somewhat if private sellers studied what is working fairly well for new home builders.


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