It may not be hurricane-strength, but a perfect storm of some strength continues to brew in the housing market.
• Potential buyers face a new hurdle with the cost of borrowing up sharply in recent weeks. The average interest rate on a 30-year fixed loan hit 6.74 percent last week, up from 6.21 percent a month earlier.
• Although the real-estate market has cooled considerably from the peak sales year of 2005, inventories suggest that supply and demand haven't yet come into balance. In April, the number of homes on the market was 23 percent higher than the previous April.
• The run-up in home prices was built partly on an unprecedented surge in risky lending to borrowers with poor credit histories or no down payments. Those excesses take time to work off. Foreclosure rates have recently reached record levels and may continue to rise over the next year as adjustable-rate mortgages reset for more borrowers.
Add in that the Fed has pretty well indicated interest rates will not be lowered in the foreseeable, and ARMs will certainly reset for more and more borrowers, a fair penny higher, and I’ll give you 50-50 odds the foreclosure rate rises at least 20 percent before leveling off.
Stir into the mix the fact new-housing starts slipped again a bit in May, and high gas prices, combined with higher interest rates and still-slipping prices may have would-be home buyers sitting on the sidelines, and you can see why the slump in the housing market will continue.
Between the housing slump possibly having wider economic effects, and foreclosures almost certain to continue rising, this is indeed a domestic policy issue that bears more watching than it’s getting right now.
Cross-posted at Socratic Gadfly.
