The housing market will continue to sit listlessly, but not on account of the recent Standard & Poor’s (S&P) credit downgrade of the U.S. and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac .
Though knee-jerk mortgage bankers cite a fear the downgrade will disrupt their mortgage market, the overwhelming consensus is general weak economic conditions residual from the Great Recession and the housing crisis are the reasons for California’s real estate’s troubles, as well as for those of mortgage lenders.
However, the downgrade’s effect on housing is entirely dependent on how Wall Street investors act. The initial reaction immediately after the downgrade produced a drop in stock prices and interest rate yields for U.S. Treasuries, both of which caused mortgage interest rates to decline to a point where they now squat at their lowest levels since the end of the Great Depression some 70 years ago.
Analysts report any fluctuation in mortgage interest rates that does occur will be minimal since mortgage interest rates are already at historically numerical lows with inflation-adjusted levels of essentially zero (normally a market-making combination but unfortunately buyers are scarce or hesitant). On top of that, few investors will soon have reason to sell their T-bond securities (which would drive mortgage interest rates up) since a AAA to AA+ downgrade will not shift their confidence in the U.S. market even though it is still struggling to get into recovery mode. [For more information on the current market rates for Treasury bills, see the first tuesday chart, 10-Year Treasury and 30- Year Mortgage Rates.]
first tuesday take: The national debt and credit agency fiascos are popular political headlines about issues which have no influence on the real estate marketplace. The politics of the nation’s credit downgrade only distracts us from acting on the fundamental problems of the U.S. economy – which are amplified in California – such as slow job growth, crestfallen consumer confidence levels, deflating consumer and real estate prices and painfully weak generational homebuyer demographics. Consider the gaudy events of the credit downgrade amusing, an accessory entertainment thrown atop the economy’s existing mountain of issues.
With or without the S&P’s credit downgrade (their cover to deflect recent congressional inquiries regarding corruption in mortgage-backed bond (MBB) ratings in the last decade), a recovery in California remains one framed as a bumpy, drawn-out affair, comparable to Japan and Mexico’s recovery from their financial crises in the 1990s.
Home sales volume will continue to be languid through 2012, not picking up any steam until 2013 or early 2014. Prices will not peak again until 2018 or so and will most likely not return – at least in the lifetime of most real estate brokers – to the speculator-driven prices pushed during the Millennium Boom. And as for the current 2,500,000 negative equity homes, those will not likely be cleared out of California’s inventory until 2020. [For more information on first tuesday’s forecast for California’s housing recovery, see the August 2011 first tuesday article, Homes sales volume and price peaks.]
Meanwhile, until home sales and prices do pick up, brokers and agents must keep an eye on the yield spread – the difference between the 3-month and 10-year Treasuries – which is a most useful tool for quickly determining future economic conditions. So far, the recent credit downgrade effect on investor activity in the Treasuries market has driven the yield spread down, indicating a greater probability of another recession in the next year and at least a downturn in real estate sales volume and thus prices. [For more information on interpreting the yield spread, see the first tuesday Market Chart, Using the yield spread to forecast recessions and recoveries.]
RE: “What the U.S. debt-rating cut may mean for markets” and “For housing market, economic worries trump downgrades” from the LA Times