The Springfield Illinois Housing Market, Life After the Downgrade
August 14th, 2011Nine days following the downgrade of the nation’s credit rating below AAA for the first time in history, and a historical up down week on Wall Street, where does this all lead?
Fed chief Ben Bernanke announced during Hurricane Downgrade that hit Wall Street the following week that he was keeping the cost of funds at zero for two years. A Fed Chairman has never placed a time frame on such moves.
Two notes of importance that will impact the housing market are evident from that move. First is the cost of funds have nothing to do with treasury bonds that set mortgage interest rates. Second Bernanke is admitting he sees no, or slow growth for the next two years.
During Hurricane Downgrade investors on the days of the big drops mostly moved their money to treasury bonds and drove down interest rates to historical lows. The thirty year mortgage finished at 4% which is causing another rush to refinance. The rush to purchase is another story.
This is a temporary situation and will last as long as investors have faith in the downgraded treasury bonds. At some point investors usually demand a higher rate of return due to a lower credit rating. Just as consumers with less than stellar credit pay higher interest rates.
I don’t see any big changes in demand for bonds while the nation is rated at AA+. What people are overlooking is that Standard and Poors has the rating at AA+ with a negative outlook which means they may lower the rating further. That’s when you’ll see sudden impact of rising interest rates.
Moody’s and Fitch rating services both have the nation’s rating at AAA with a negative outlook. Both may lower their rating to AA+. That will supply pressure for investors to demand higher rates of return. All the above would ripple throughout the economy from mortgages, car loans, to credit cards.
The window of opportunity is here for home buyers to purchase a home with the cheapest money in over seventy years. Once in a lifetime? Probably. But the rush has not materialized yet. Home sales through August 12 compared to the same time frame in 2010 were down 11.5%.
This needs to be put in proper perspective. The local housing market fell to the lowest number of sales in 2010 since 1999, in spite of two home buyer tax credits, and near historic low interest rates throughout the year. We are 11.5% behind that pace of sales.
Why are sales so anemic? Jobs. The economy is just not creating any significant number of jobs to add buyers to the market. With the Bernanke outlook for no or slow growth the next two years, with persistently high state and national unemployment, this is going to be a slow crawl back to normal.
My advice for potential home sellers and home buyers is to take action immediately. This window of opportunity will close if we are downgraded further, or after the stock market calms and the big investors move out of bonds decreasing demand. Foreign countries then will be needed to pick up the slack. China has been selling their holdings, and Europe is mired in a debt crisis of their own. So count them out to fund our debt.
These will be tenuous times as this all unfolds. This has never happened before, a US downgrade. In my opinion the heavy cost of the stock market falling 10% since April when the economy stalled with less than 1% growth in the GDP the first half, then falling more with the downgrade, have cost people’s 401k’s and IRA’s a couple trillion.
The result is published in this Bloomberg report:
Confidence among U.S. consumers plunged in August to the lowest level since May 1980, adding to concern that weak employment gains and volatility in the stock market will prompt households to retrench.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment slumped to 54.9 from 63.7 the prior month. The gauge was projected to decline to 62, according to the median forecast in a Bloomberg News survey. [end quote]
People don’t buy homes when they have no confidence in the economy, are worried about their jobs, and have just witnessed their retirement funds take a major plunge.
Another negative impact upon the housing market will come later. I believe you will be watching record refinancing at seventy year low interest rates. Once interest rates begin to climb back to normal levels, which historically is around 8%, how many families will trade their 4% mortgage for an 8% mortgage to simply change homes? The move for convenience will be eliminated from the market, placing a drag on demand, and inventories of homes for sale.
Life after the downgrade will be interesting to watch unfold. We may see a burst of activity from folks who are renting and can now afford to purchase. However with the flat jobs market it won’t amount to much. Just this June Realtors were all excited that the Spring market finally arrived, January through May sales were abnormally low.
Realtors are accustomed to a spring market that lasts about 12 to 14 weeks. Many years when March hits, the next thing you know it’s the Fourth of July and time to catch your breath. The June rally fizzled by mid July. Don’t get me wrong, Realtors appreciated that burst of sales, but it was woefully short lived.
Springfield is a very resilient community. The excitement that Scheels has brought the community lifted every one’s spirits. The announcement of the Outlet Mall is encouraging. Even with all that I don’t anticipate home sales to run more than 75% to 80% of what we would expect in a normal market and economy.
Yes it will be a slow crawl back to normal. But we’ll get there. This will be life after the downgrade in the Springfield housing market. Slow but steady, at about 75% of normal. Weaker than normal demand will present a challenge for families that must sell their homes.
The opinions expressed here are solely those of Fritz Pfister or identified sources, and not necessarily those of RE/MAX Professionals of Springfield or RE/MAX International.
