Fritz Pfister

Lots of news on the economy this past week. Unemployment figures were released yesterday showing a loss of over a half million jobs in April raising the unemployment rate nationally to 8.9%. At last report Illinois unemployment stood at 9.1%. April figures for the state and city should be released soon. As stated here before, as jobs and consumer confidence go, so will go home sales.

It was reported in today’s SJR that home sales were down locally in the first quarter by 3.3% in spite of a jump in March sales of 13.4%. What we reported here a month ago. What wasn’t reported was that April home sales were down 11.4%, and sales pending were down 13.5% from April 2008. Year to date home sales are down about 6%, and sales pending down just under 3%. A run of four consecutive weeks of over 100 home listings going under contract has slowed the decline in sales pending.

This year’s decline in home sales is on top of a year when the local housing market experienced its first decline since 1994, and is occurring at a time when the conditions for home buying are some of the most favorable ever.

New construction also continues to be slow. The ten single family permits in March produced a grand total of fourteen single family permits for Springfield in the first quarter. The slowest pace since 1982. Coincidentally unemployment is at the highest levels since 1983. Further proof jobs are the key to the housing market this year. How else can one explain why the number of home sales would decline when interest rates are at 50 year lows, and there are tax incentives to buy?

For a couple of months I have been warning potential home sellers and buyers that the window of opportunity is open, but it won’t be for long. Interest rates bumped up a little this week, while lenders have changed their forecast that interest rates would hold steady through fall, to now predicting rising rates sometime this summer.

Today’s interest rates are not market driven, they are artificially low as the result of the Fed buying 1.3 trillion in treasuries. You can not have a true housing correction when government manipulation has produced a false market. Rates will go up. The good intentions of the government delays the inevitable. Fannie Mae said on Friday it needs an additional $19 billion in government aid. Job losses are now adding to the default rate at a time when the market continues to rid itself of bad home loans made during the housing boom which were the result of government intervention into the housing market through Fannie Mae, Freddie Mac, and HUD.

To every cloud there is a silver lining. The skeptical consumer has pulled back and is playing it safe waiting to see if current government plans will help or hurt the economy. This has led to a decline in the local inventory of homes for sale. The 1671 homes listed for sale with Realtors today is the lowest on this date since 2006.

Ladies and gentlemen, the time to act is now if you want to buy or sell a home. You may never see the interest rates this low again in your lifetime. The reason interest rates are increasing is because the government is having a hard time finding buyers for treasuries it needs to fund the largest deficit spending in history. As a result the Fed has tripled the number of treasury auctions.

The economy shrank 6.5% in the first quarter for the steepest decline in 50 years. The GDP is forecast to shrink another 3.5% in the second quarter, and be flat in the third quarter according to testimony by Fed Chairman Bernake. He predicts that the  economy should begin to see growth by the fourth quarter, however it will be slow going. The gamble the government is taking with current spending, is that the economy will expand to 3.5% growth by 2010, and by raising taxes on the wealthy, government will be able to cover the payments on this debt.

Only a couple of problems. By all estimates, except one, that won’t be enough. Due to the contraction in the economy the income of the wealthy is falling so there will be less income to tax as had been projected, and the jury is out on growth in 2010. Even if there is the projected growth many blue chip economists and the CBO (Congressional Budget Office) predicts the growth to be temporary and that the deficit spending of one trillion dollars annually will actually cause the economy to contract.

Those skeptical consumers have good cause to pull back. If the current level of record government spending does not produce sustainable growth that will generate enough tax revenues to cover the estimated $800 billion annual interest payment, and that’s at today’s low interest rates, then the government will be forced to raise taxes, borrow, or print the money. Inflation is becoming a bigger threat as all this unfolds. Either way, inflation, higher taxes or both will extend the recession.

Time to act if you want to buy or sell a home, the clock is ticking. The best case scenario is that this massive government spending works and the economy recovers and prospers. The worst case scenario is that the spending harms the economy. Which do you believe is more likely to occur?

My advice is to work with what is available to you now. Affordable prices, big selection of homes, tax incentives, and probably once in a lifetime interest rates. During this time of uncertain outcomes, don’t miss your opportunity of today.

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