Economic Commentary

We are going to have to pay the price…

Eventually we are going to have to pay the price. The government has reported that our monthly budget deficit was over $100 billion in July. Projections show that we could easily exceed a $500 billion deficit for this fiscal year. What caused these exploding deficits? There are too many factors to even count on one hand–but economic stimulus payments, rescuing financial institutions and fighting a war while the economy slows down are all part of the equation. Why is the government borrowing so much even important? When the government borrows it increases general demand for funds. Essentially, the government is competing against us when we are borrowing to purchase a home. This forces interest rates higher.

The long-term result of big deficits is higher interest rates. However, we need lower rates desperately right now to help the real estate market and thus the economy to recover. It is another catch-22. Higher rates make the deficit worse because the government pays more on the debt. Higher rates also slow down the economy. And that in turn makes the deficit worse. Therefore, the Federal Reserve Board knows we need lower rates to help the economy. Low rates in the face of large deficits can cause inflation to increase and the latest consumer price numbers show that we are indeed in danger of inflation running out of control. This is why the recent drop in oil prices is such good news. The message? We need to find a way to get the budget under control so that we have room to let the economy recover–without the strong medicine of higher rates. Our slow economy will force the President and Congress to consider more economic stimulus payments. Perhaps they should resist the temptation.

Few Mortgage Tips

1.With the sub-prime issues continuing to impact the real estate industry, it is refreshing to know that veterans can get 100% financing on a single family residence. The lending limit for a veteran to purchase in Utah is $417,000. This applies to duplexes, triplexes and fourplexes as well

2.Did you know that missing just ONE payment on that little credit card balance can cause your FICO score to drop 100 points in one month and could disqualify you for a loan, even if the minimum payment is only $5.00. Watch those little ones. . .paying only the minimum on time is more important than paying the whole balance off.

Plenty of Positive Market News Today

Hungry for a little good real estate news? Leon d’Ancona, president of IMS Inc., has something to cheer you up.

D’Ancona, who provides real estate information to the industry, has set up a Web site that lists 2,319 markets in the United States where homes are selling well.

For instance, Loganville, Ga., homes sold 38.5 percent faster in April than they did in March, and sales of homes in Avondale, Ariz., increased by 64 percent in April compared with March

"The problem with glass-is-half-empty stories is that they have an undue psychological impact on markets that is not borne out by all the facts," says d’Ancona. "We know, because it's our business to know, that there are hundreds of cities and thousands of neighborhoods in the United States right now where the market is very healthy, thank you.”

Reduction in Days on Market
only positive changes are shown (%)

Clinton -3.5
Herriman -14.1
Logan -3.9
Magna -4.2
Ogden -2.8
Orem -10.1
Park City -18.8
Provo -5
SLC -8.5
South Jordan -1.8
Syracuse -13.8
Tooele -18.5
West Jordan -11.6

Utah's Real Estate Market

Two recent real estate reports show Utah's real estate market is considerably weaker than a year ago, but home prices continue to appreciate. A report out yesterday on April's home sales in Salt Lake show a volume decline of 33%, but a price increase of 2%. This is reflective of other areas of the country that showed a decline ahead of us.

The Salt Lake Board of Realtors is optimistic about these numbers:

But Realtor officials said Tuesday they believe that any downturn here will be comparably shallow and short-lived.

Board president Jillinda Bowers said April was the third consecutive month in which home sales increased in the county. Last year, sales started to slip in the summer, with January's total of 634 an eight-year low for monthly sales. April's total of 972 units sold is up from 934 in March and 746 in February.

"It appears to be a trend" of increasing sales, Bowers said.

I disagree. Utah's housing market is having a downturn and will continue to do so for probably a year. Looking at month over month sales is a poor indicator of progress. However, demand for starter homes and low cost homes will continue to increase with commensurate price increases. Homes above $300k in the valley will have slight problems selling. Price points above $600,000 will see the greatest price drops, especially next year, the most difficult price to sell.

Even though the analysis may not sound good, what we should focus is:

1. the interest rate is still low
2. it is a good time to buy: you can negotiate concessions and possibly lower price
3. if you are buying the house for more than two years, you will be fine. And, in the meantime, your house is still appreciating
4. The rent market is strong and very competitive, definitely landlord's market
5. we are going through this economically difficult times better than other states.


Utah is No. 1 among states in home-price appreciation with a 5.6 percent increase, relinquishing the top spot to Wyoming, which posted a 6.3 percent gain, according to a report released today.

Montana rounded out the top 3 with a 4.9 percent increase, according to the House Price Index report by the Office of Federal Housing Enterprise Oversight.

The OFHEO numbers reflect refinances as well as purchases and that's why they show bigger increases than the Board of Realtors that only reflect sales of existing homes. Realtor numbers showed less than 1% appreciation in the first quarter.

I don't expect a housing crash. It will slower than 2005 and 2006, little slower or same as 2007.