The effectiveness of any further stimulus package will depend on where the money is spent. With the unemployment rate rising to 6.5 percent and 240,000 payroll jobs lost in October, creating jobs will be the first priority, which is why President-elect Obama said more aid to Detroit automakers was a priority in his first press conference. Jobs were lost equally in the manufacturing and service-sectors. Health care was the only industry that added jobs.
Attention is also being focused on fixing the housing market, since most experts believe that housing has to show signs of a recovery to lead the economy out of this recession. As many as 20 percent of subprime and negatively amortized option ARMs are in default, so lenders are now working on several ways to stop the foreclosures.
Firstly, anyone behind in payments on their primary residence should contact the lender to work on lowering their interest rate and payment. And if eligible, they can petition FHA for a lower interest rate replacement loan if their current lender will accept a 10 percent reduction in principal.
We also discussed some proposals in last week’s column that called for the federal government stepping in to directly pay down either the loan amount if larger than the home’s value, or a direct subsidy to buy down current interest rates to more affordable levels.
The Federal Reserve has lowered its fed funds rate another one-half percent to 1 percent, the lowest rate since 2003. This brought more relief to short-term rates that determine adjustable mortgage rates including the Prime Rate, which is now 4 percent.
There was some good news. New and existing-home sales improved in September for the first time in a year, a sign that both prices and interest rates have fallen to more affordable levels. Conforming 30-year fixed rates are now in the 5 percent range, while the so-called jumbo-conforming 5 and 30-year fixed rates are hovering around 6 percent.
And new and improved conforming loan limits will take effect in January that will also boost housing sales and refinancing. It allows conforming loan amounts of $625,500 for a single unit up to $1,202,925 for 4 units. You should call your favorite banker or broker to get more details.
Housing affordability could continue to improve as housing prices continue to fall in many metropolitan areas, particularly in California and Florida. S&P’s Case-Shiller existing-home price index is down 20.3 percent from its June 2006 peak and homeowners have lost $4 trillion in equity. But values had risen more than 50 percent from 2003 to 2006, according to Case-Shiller, which means most homeowners still have substantial equity left.
The National Association of Realtors’ affordability index has risen significantly over the past 6 months. The index reached 135.2 September, which means a family with a median income of $60,350 can now afford a home 135 percent above the current median, existing single-family home price of $190,600. This is because the median price has fallen 13 percent from its high, while median income has risen a total of 9 percent over the past 3 years.
There is a growing consensus that the housing crisis is at least bottoming out, though no one knows when prices will begin to turn up. There is an incredible ‘overhang’ of 1 million excess housing units for sale that have to be absorbed before the supply of housing again equals demand. We will see that happening in two ways; sales will continue to pick up and the number of foreclosures and short-sales will shrink back to more normal levels.
© Harlan Green 2008