Fritz Pfister

Why the sluggish home sales? Coming off several months with interest rates at historic lows below five percent on thirty year mortgages, an eight thousand dollar tax credit for first time buyers, four thousand dollar state grants for first time buyers, and an above average number of homes for sale, one would think home sales would be skyrocketing. They’re not. Four of the first five months were down in this historically stable Springfield Illinois housing market, and in May by 20%.

The primary factors affecting housing sales are affordability in both interest rates and home prices. Availability, the 1683 homes listed for sale today are the fourth highest on record. Jobs, the number of employed, qualified buyers to purchase those homes. And consumer confidence, the willingness to spend for major purchases such as homes.

The most recent unemployment numbers for the state of Illinois are 9.4%, while the city of Springfield is at 6%. Both April numbers. The nation is at 9.4% in May. If the local unemployment is well below state and national unemployment rates, there is an ample supply of homes for sale, money is affordable, prices are reasonable (the median sale price in Springfield stands at $107,000, well below the state and national median sale prices), that leaves consumer confidence as the most likely culprit suppressing home sales.

What are the major influences upon consumer confidence? The cost of living, job security, financial security, and one’s faith in the future.

Gas prices have sent a chill through many consumers. Up to a national average of $2.639 per gallon from $1.60 in December is noticable. Families remember all too well the $4 a gallon price from last year, and the impact upon food prices. Not much here to inspire confidence, more so apprehension.

Especially when considering the Obama administration is against expanding drilling for oil offshore, and in the mainland where abundant supplies lay ready for the taking. This more than any other action keeps the American family held hostage to foreign oil. Wind and solar energy are not enough, or soon enough to supply a country with 90% of its’ industry and transportation that is dependant upon oil. During a time of recession, government actions that drive up the cost of oil are illogical, and does not inspire confidence.

Interest rates are on the rise, with thirty year mortgage rates up a full percent in three weeks. Why? The Obama administration’s attempt to fund their profligate spending, a quadrupling of deficit spending in one year, not counting the stimulus bill, or the federal reserves injection of trillions of dollars into financial institutions and the money supply, must offer higher rates of return on treasuries to attract buyers. This causes interest rates to go up on everything from mortgages, car loans, to credit cards. Not much to inspire confidence here either.

On top of the deficit spending already in place the Obama administration now wants to add over a trillion dollars to federal spending for universal health care. Bloomberg reports the initial proposal includes six hundred billion in new taxes. History shows how well the federal government manages money, with social security/medicare/medicaid nearly insolvent because politicians spent money elsewhere marked for these programs. Higher taxes and mismanagement don’t inspire much confidence.

Waiting in the wings is cap and trade. Regardless of whether or not you buy into the end of the world scare tactics of environmentalists, the fact is that if cap and trade passes every consumer of electricity will see significant increases in their utility bills. By an estimated $3000 annual household increase. This one is a real confidence builder.

A theme throughout many news stories this past week were about the reason why the stock market has stalled. Worries about rising interest rates and inflation. The Obama administration is gambling by placing the economy at risk for both high interest rates, and hyper inflation with their belief government spending will create economic growth. They have one chance to be right. If Obama is wrong the misery index may be called out of retirement. Consumers are taking a wait and see approach, especially those who lived through the 1980’s, which means their confidence is stuck in neutral.

Locally both the city of Springfield, and the state of Illinois are in financial chaos. The mayor after a budget just passed in February addressing a twelve million dollar deficit, just announced an additional nine million dollar shortfall due to falling tax revenues. The state has no budget, an eleven billion dollar deficit, and falling tax revenues. This does not inspire confidence in this capitol city.

What’s the common theme between the city and state? Doomsday cuts to services. In the case of the state, the fight is over whether to raise taxes 50%, 67%, or not at all. Raising taxes never produces the revenues politicians project, because businesses may leave, close, or lay off workers. Individuals may move out of the state. Just ask New York or California. Increasing taxes, and doomsday speak by mayors and governors do little to inspire confidence.

In retrospect, what would home sales have been without record low interest rates, tax incentives, and grants?

Consumers will remain skeptical until there is certainty. Will taxes be raised by federal, state and local governments? Will cap and trade pass and increase utility bills? When will an economic recovery begin? Will the recovery be short lived? Will the recovery be slow with unemployment remaining high for several years as Bernanke predicts? Will interest rates continue to rise? Will the historic levels of Obama deficit spending cause hyper inflation? 

Until there is certainty, consumer confidence will be subdued. There is a current up tick in home sales in June, however with all this uncertainty, don’t expect the current up tick in home sales to be sustainable. Consumer confidence will determine how the Springfield Illinois housing market performs in the upcoming months. We shall see.

The opinions expressed are solely those of Fritz Pfister, and not RE/MAX Professionals of Springfield or RE/MAX International.