Taking Charge

by Lawrence Yun, Chief Economist, NAR Research


You wake up one Monday morning to find Fannie Mae (FNMA) and Freddie Mac (FHLMC) no longer exist - that was a scenario that NAR staff - and no doubt a number of other economic, financial and housing market watchers - have been contemplating over the past month. Well, the government did, in effect, take over Fannie and Freddie. And guess what - on the Monday morning after the official announcement, the sun still came out. The question is: will this mean darker skies for housing and our economy?

Predictions
The federal government had no choice because the capital situation of two organizations was insufficient to face the upcoming realities of rising mortgage defaults. We will now have to wait and see what impact the government's action will have. I think we can make some predictions.

First of all, it is likely that mortgage rates will trend down over the short run. But how much of a decline will depend on how actively the government - more specifically the Treasury Department and the new Federal Housing Finance Agency (FHFA) - loosens the mortgage liquidity spigot. For over the next 12 months at least, the FHFA has the authority to purchase more than the normal amount of mortgages from lenders to put into its portfolio holdings. That means all conforming loans, including the newly conforming jumbo loans up to $625,000, will qualify for purchase by the FHFA. That will help drive down mortgage rates. In about two years' time, when the housing recovery is assumed to be well underway, the government will trim its mortgage portfolio. Then Fannie and Freddie will be completely restructured. It will be up to the next administration and Congress to determine that structure. And be assured that NAR will make its 1.3 million voices heard during those discussions.

The credit spread between the 10-year Treasury and the 30-year mortgage rates has greatly widened in recent months due to the uncertainties that surrounded the fate of Fannie and Freddie. The typical historic spread has been about 150 to 180 basis points. That means if the 10-year Treasury yield is 4%, then the 30-year mortgage would be about 5.5% to 5.8%. Recently though, we have seen the spread at 250 to 300 basis points. With the government's takeover of Fannie and Freddie, the spread will surely narrow and hence result in lower mortgage rates. That is good for the housing market.

Call to Action: Salt Lake Tribune gets it wrong

According to UAR (Utah Association of Realtors), Salt Lake Tribune gets it wrong...See what UAR thinks:

"UAR encourages members to contact Trib regarding Thursday’s story

At a time when Money Magazine and The Associated Press are reporting that Utah is bucking the national housing slump, the Salt Lake Tribune is saying “ Utah ’s housing boom now a bust.” Thursday, the Salt Lake Tribune reported on its front page that new home demand was at a 17-year low, a story that included broad generalizations about the Wasatch Front housing market. The Utah Association of REALTORS® is encouraging REALTORS® to contact the Tribune directly to tell them why they got it wrong.

What to Say to the Salt Lake Tribune

The story’s headline, which said, “ Utah ’s housing boom now a bust,” was misleading and inaccurate. The story only cited statistics regarding home-building permits; the story did not mention existing home sales or the pockets of new-home construction that are doing well. The headline led Tribune readers to believe that all segments of Utah ’s housing market are doing poorly. If such broad generalizations are going to be made in headlines, the Tribune needs to include information about each part of the housing market in the story.
The Tribune article quoted an individual who said, “ ‘People are afraid to purchase’ a home right now,” a misleading statement that could cause buyers to miss out on great appreciation opportunities. It’s a disservice to the Tribune’s readers to suggest that prospective Utah home buyers shouldn’t buy now when the National Association of REALTORS® projects Utah will see home prices increase anywhere between 7 and 10 percent in 2008. That means the buyer of a $200,000 home could miss out on $14,000 worth of appreciation by waiting to buy.
The story suggested that Utah buyers have been unable to obtain loans when in fact financing is readily available and affordable. Mortgage rates are still at historic lows, with interest rates on a 30-year fixed mortgage near 6.38 percent, much more affordable than the double-digit rates seen over the years. For buyers who would have needed subprime loans that are no longer available, safer FHA products will be able to help serve their needs.
Utah has strong market fundamentals — good job growth, population gains and low unemployment, which will keep demand for housing high.
Real estate markets are complex and the Tribune’s readers are not served by misleading generalizations that don’t tell the entire story.

Contact Salt Lake Tribune business reporter Lesley Mitchell at (801) 257-8714 or business editor Michael Limon at (801) 257-8798 to let them know you want to see more complete coverage of Utah’s housing market."