If a retailer wants to stimulate sales, what does he do? He lowers prices. It's a simple, yet powerful, principle of economics that we've been proselytizing over the past two months, and for good reason, it works. To wit: The National Association of Realtors (NAR) reported that its index of pending home sales, which measures contracts signed but not closed, rose 6.3% to 87.7 in December. Year-over-year, the pending-home-sales index was up 17.5% in the West and 1.6% in the South. Even more encouraging, the index's numbers reflect the most favorable combination of home prices, mortgage interest rates, and family income since tracking started in 1970.
Lower mortgage prices have contributed greatly to improving housing affordability. The prime 30-year fixed-rated mortgage has been floating below 6% for the past three months. But the mortgage market's contribution could diminish in the near term. Recent news that the federal government is seeking ways to lower mortgage-rates further sounds like a positive, but could actually be doing more harm than good. Yes, lower rates are a good thing (and we understand the NAR supports intervention to push rates lower), but if people are always anticipating lower rates, they hesitate to act today. Let's not forget that mortgage rates in the 5% range are darn-good rates, and even those can be readily refinanced if the feds succeed in pushing rates down.
While housing prices and mortgages have trended lower, unemployment has trended higher. Jobs, or the lack thereof, is the monkey wrench that could conceivably grind the housing-recovery gears to a halt (operative word being “conceivably”). On that front, there was much media teeth-gnashing and lamenting last week because the unemployment rate rose to 7.6% on 598,000 lost jobs in January.
How did the financial markets react to the “dire” unemployment news? The Dow Jones Industrial Average surged ahead 150 points in the first hour of trading. Like we stated last week, many economists view the recent job cuts as a bottoming of the recession, not an omen of things to come. It appears the stock market shares the same view.
Eric P. Egeland