With billions and billions of dollars being poured into the financial system every month, should you be surprised that fewer people are able to afford to buy houses?
On one hand, you might think that the Fed's quantitative easing should have kept mortgage rates down, as intended. On the other hand, that money has to go somewhere -- so why wouldn't it contribute to a rise in house prices?
In this week's podcast, Bankrate's Washington bureau chief, Mark Hamrick, talks about this conundrum with:
- Walter Molony, spokesman for the National Association of Realtors.
- David Smick, global strategist for Johnson Smick International.
Is the end of the Fed's easing already hurting housing?
A look at the Federal Reserve after the Bernanke era. How and where are rising interest rates affecting the housing market?
LISTEN TO AUDIO
Mark Hamrick: From Bankrate.com, this is Your Money This Week. I am Mark Hamrick, reporting from Washington.
Whether you're looking at home sales or home prices, we've seen double-digit gains from a year ago. The housing market has dug itself out of the hole, otherwise known as the Great Recession, but slower growth appears to be in the offing, with mortgage rates edging up. We will check in with the National Association of Realtors and spokesman, Walter Molony. Also, David Smick, global strategist with Johnson Smick International. With a change due at the helm of the Federal Reserve, who might the next captain be? And, what are the dangers, now that the Fed is about to make an abrupt turn when it comes to monetary policy. We'll have all that and more for you on Your Money This Week.
In our first segment, home sweet home. We're talking about the housing market. It is, of course, of interest to anyone who owns a home, aspires to buy one, as well as anyone who wants to sell one. We checked in with Walter Molony. He is spokesman for the industry's main trade group, the National Association of Realtors. I asked with the interest rate associated with the 30-year fixed mortgage up a full percentage point over the past few months, how are sales holding up?
Walter Molony: They've been holding up and higher mortgage interest rates are now causing home sales to level out. The tight supply conditions look to be with us for the balance of the year in most of the country, but we are seeing sales beginning to flatten. So, it looks like most of the growth in sales has already taken place this year. Total activity for 2013 should be up in the range of 8 (percent) to 8.5 percent over 2012.
Mark: So, when you say total activity, are we talking about sales of previously owned homes there?
Walter: Yes, closed, existing home sales should be coming in right around 5 (million) to 5.1 million, which would be in the low end of the historic norm of what you would consider to be a normal market.
Mark: OK. So, we had seen, you know, essentially, as we said at the outset, a pretty significant increase in sales on a year-over-year basis. So, is this taking some of the wind out of the market, if you say they're flattening?
Walter: Yeah, it is, and I think that you've got the twin frictions that have been holding the market back for some time, mainly the unnecessarily tight mortgage underwriting standards and the limited supply. So, the limited supply is limiting opportunities and putting pressure on prices as well.
Mark: Is this hitting one end of the market more than another? Let's say from moderately priced homes up to the more luxury homes?
Walter: Well, the rising interest rates we think are going to have an impact noticeable first in the highest-cost markets, where you're talking coastal California, New York, other very high-cost markets in the country, where even though median incomes in those areas are much higher, the rising interest rates will begin to pinch affordability. In most of the mid-section of the country, when you look at the fact that prices are still quite affordable in historic terms, you're looking at the market being driven by demand and wherewithal, and not so much by rising interest rates.
Mark: So, what kind of a dampening impact does this have, let's say on your outlook for sales in the coming year? I know you said, let's say for all of 2013, but how does that affect, let's say, 2014?
Walter: We're looking for a more gradual rise in sales right now. It's looking like sales will be up only 2 (percent) to 3 percent in 2014, getting up to the 5.1 (million) to 5.2 million range, getting a little bit more into normal, and at the same time, we're looking for housing construction to continue to trend up, and that, hopefully, will help to moderate the growth rate in home prices. So, prices are likely to still rise above normal rates in 2014, but dialing back from this year, we're looking at about an 11 percent overall increase this year. Next year, maybe 5.5 (percent) to 6 percent, much closer to normal.
Mark: So, you know, to the extent that, obviously, the recession really hammered the housing market and we've been in a recovery mode over these past several years, you did use the word "normal" just now. Do you really think that 2014 gets us to something that we'll begin to think of the housing market as normal again?
Walter: Yeah, barring the unforeseen, we've still got this pent-up demand that results from five years of a slowdown in household formation during the economic downturn. Population was still growing, about 3 million a year, but people were now going out and renting apartments or buying homes. And so, we still have that pent-up demand -- and with job creation, and that really is the long-term key -- that gives people the wherewithal to get into the market. So, even with rising rates and higher prices, you are still looking at a 30-year fixed rate in 2014 averaging somewhere around 5 percent, which really is pretty good in historic terms.
Mark: Yeah, let's talk about that historic kind of perspective, because those of us who are of a certain age can remember taking out a mortgage that literally had a double-digit percentage interest rate, and we thought, while that wasn't a wonderful situation, we still got into a home back then. But, those were different economic times, and obviously, I know you wouldn't wish that upon the economy anytime soon, but do you think the housing market can fare OK in a rising-interest-rate environment?
Walter: It can, as long as it doesn't go up too fast. We still have these excellent affordability conditions, primarily because of interest rates being historically low, but more so because prices overcorrected on the downside. We had prices fall below replacement construction costs in the U.S., which is what made it so attractive to investors. Investors just came out of the woodwork over the past two years, and buying properties was pretty much a no-brainer, because they could pretty well turn these properties around and quickly turn them into profitable rentals. Now that is changing. We've seen the investment activity edging down, instead of it being a no-brainer, that people have to think about it, they have to look at what is going on in the neighborhood, what is the rental demand, what's it going to cost me to get this home up to market standards. So, they have to do a little bit more homework.
So, investors are still a major factor, but one of the reasons that the investment activity is attenuating somewhat is that the inventory that was most attractive to them, low-end properties, foreclosures, that is drying up. When you look at sales of homes priced under $100,000, the volume of sales in the low price range is 25 percent below a year ago. And, if you look at a half million and higher, it's up 25 percent. So, the low-end inventories pretty much disappeared and that is one of the reasons why first-time buyers are really not in the market like they should be. They've been around 29 percent of the market, and should be really closer to 40 percent. So, that, I think that with the investors stepping back, maybe there will be a little less competition for first-time buyers, in the more affordable markets at any rate.
Mark: Well, if nothing else, the experience of the last several years, Walter, has demonstrated the importance of the housing market, not only for individuals, but also for the broader economy, and we appreciate your time in helping us to know where things stand today. Walter, thanks so much.
Walter: You're welcome, Mark.
Mark: Walter Molony, spokesman for the National Association of Realtors. He spoke with us from his office in Washington.
Next up, David Smick. He's an expert on the subject of the global economy, as well as the people who try to manage it, namely, central-bankers around the world, including the Federal Reserve here in the U.S. He is global strategist for Johnson Smick International, and author of the best-selling book, "The World is Curved," which in many ways, foresaw the economic crisis of 2007 and 2008. I asked David just where the economy stands all these years after the crisis.
David Smick: Globally speaking, we've bet the bank, we've had stimulus and bailouts and guarantees and all the rest, equivalent to about one quarter of global (gross domestic product), and we've got an ocean of newly created money floating around, and what was the result? Global growth is actually declining. It has been declining every year. So, it's not necessarily an encouraging thing. In the U.S., the situation is mixed. You know, we've got some good data, but the employment situation is a disaster. Sometimes the data is up, down, but I think the biggest worry is that we kind of have a stock market, which has been heavily driven by liquidity from the Fed's policies, and it's kind of like a Ferrari-style stock market. But, we have a Mini Cooper-style economy backing it up. So, I think there is a mismatch and going into this fall, it makes me nervous even though these measurements of volatility, you know, are at historic lows. It still is disconcerting.
Mark: So, to back away from that a little bit, what you are alluding to there, a little bit, is among some of the extraordinary measures the Fed's taken to try to build momentum in the economy, a so-called quantitative easing or QE3, the $85 billion of monthly asset purchases. Many are trying to figure out when the Fed is going to scale back or taper. You would expect that they will be doing that before long?
David: Yeah, my prediction is that sometime this Fall, (Chairman Ben) Bernanke will do what I call a dovish taper. He'll taper this kind of fire hose of liquidity that is pumping $85 billion of new money into the economy. And, you know, but not down to zero. He might drop it to $70 or $65 billion a month, but it'll be a taper. And, but I think on top of that, he'll try to sound very, very dovish on actual levels, interest rates, perhaps suggesting he'll keep rates longer at near zero, that is, short-term rates sitting near zero percent, than markets anticipate. So, the idea is to try to kind of present a dovish tapering. You know, I mean, in May, the chairman hinted that he might do some tapering of quantitative easing, you know, at some vague time in the future and all hell broke loose. I mean, we saw the short-term interest rates jump from 1.5 (percent) to 2.7 (percent) and stock markets all over the world took a big hit.
And, you know, the chairman is in a very, very difficult, no-win situation. I mean, he's going to require extraordinary skill to get out of this, because on the one hand, if he tapers, he knows what has happened in May, and it's going to be very, very dicey for him to pull this off, without some kind of a miscommunication, the markets, well, the markets spook. On the other hand, and, you know, if he doesn't taper, then, you know, potentially he has the equity bubble even larger. And, it's not just the domestic issue, because to a certain extent, quantitative easing has created liquidity for the rest of the world. Traders call it the "dollar-carry trade," but, you know, you saw just a hint in May of pulling back on the liquidity, and what happened? Well, you saw capital pour out of places like India. I think it could happen in China, to put a lot of pressure in China on the so-called shadow banks, which are the shadow financial system, which is propping up their real estate market there, and it's rather fragile.
But, just look at what's happened to India in the last few months since the Fed has been kind of murmuring about tightening or pulling back on quantitative easing just a little bit. What's happened? You saw, you know, the Indian currency drop by 40 percent and their economy start to reverse. And so, there is a lot of capital that had gone into emerging markets they were going to pull out. And so, it's going to be very, very difficult, because, you know, to a certain extent, you know, Ben Bernanke's not just, you know, U.S. central-banker, he's kind of like central-banker to the world.
Mark: Yeah, it gives new meaning to the notion of falling like a brick, doesn't it?
Mark: David, and when we're talking about the Federal Reserve, there is the personnel issue. Mr. Bernanke's term ends in late January of next year. And, through this year, the widely seen successor to him has been Vice Chair Janet Yellen. Apparently, she still is seen as the front-runner, but Larry Summers has been poking his nose in there a little bit, and so it seems like it's a little bit more of a horse race than what had been seen before. What's your take on all that?
David: Well, I think it was kind of like five years ago when the Obama administration came to Washington. I think Summers expected to be Treasury secretary, and when he wasn't, he was coaxed into coming into the White House as economic adviser. I think, not, without a promise of being Treasury secretary, but kind of with the understanding he would be considered.
And so, you know, I think there are clearly two candidates. Janet Yellen, who is very capable, and then Summers. Janet Yellen is capable and kind of a get-along personality. My guess is the Fed would be kind of run by committee, whereas Summers is brilliant, but prickly and so, you know, Summers would run the Fed. And, this is not based on anyone I've talked to, but my gut instinct is that the supporters for Summers and Yellen will attack the other person's candidate for the rest of the summer and into September, at which point that'll probably open up the opportunity for a third candidate to emerge. Probably, you know, maybe somebody like former vice chairman Don Kohn, who has had 40 years of experience. He's 69, but, you know, he probably would just do one term.
But, he would be kind of the compromise, if in fact it got so nasty between the two leading candidates that, you know, the president was afraid that if he didn't pick Janet Yellen, she might resign. But if on the other hand, if he picked Yellen, Yellen is, you know, is pretty adamant and clear in her statements, you know. She was, she is probably more dovish than Bernanke. And, probably Summers is slightly less dovish. So, you know, I don't know what, if Yellen produces, what effect she has on the dollar of having a Yellen appointment. But, it would definitely be a sign. The doves at the Fed clearly have the majority, and then if they had the chairmanship, that would be very clear which direction the Fed and perhaps the dollar. The dollar, of course, depends on what's going on in the rest of the world, and I think you and I have always discussed how the U.S. is winning the global contest of ugly people, where America is the least ugly contestant, as bizarre as that sounds.
Mark: Yeah, very well put, David. Well, it's always great to catch up with you, David Smick. We really appreciate your time.
Mark: David Smick, global strategist with Johnson Smick International and founding editor of the quarterly magazine, International Economy. He spoke with us from Nantucket.
Finally, our look at this week in business history. On Aug. 19, 1871, Orville Wright was born in Dayton, Ohio. He and his brother, Wilbur, are credited for inventing and building the world's first successful airplane. Orville Wright was also a printer and publisher, and a bicycle seller and manufacturer. Wright was quoted as saying, "If we worked on the assumption that what is accepted as true really is true, then there would be little hope for advance." But, even Orville Wright didn't see all the potential of his own invention, also having said, "No flying machine will ever fly from New York to Paris, because no known motor can run at the requisite speed for four days without stopping." He outlived his brother, dying in 1948 at the age of 76, having witnessed the era of the horse and buggy, as well as the debut of commercial air travel.
You have been listening to Your Money This Week. Our thanks to guests Walter Molony and David Smick. If you enjoyed the podcast, please rate and subscribe to the program. We're hoping you can help us to get the word out. For more on this and other personal finance issues, visit Bankrate.com, and you can follow us on Twitter @Bankrate. Our editor-in-chief is Julie Bandy; managing editor, Katie Doyle; assistant managing editor, Holden Lewis. And, thanks to producer Lucas Wysocki for his work back in the studio.
I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.
[End of audio]