inman fed should stop

http://www.inman.com/inmannews.aspx?ID=54095

No one likes inflation, and the Federal Reserve's mission to fight this economic woe is an excellent concept for a government agency. Yet each time the Fed acts, or fails to act, the U.S. economy in general and the gigantic real estate sector in particular are at risk. That's why the Fed's hand on the lever of the U.S. economy should be moved at all times with delicacy and caution, and right now, not at all.

The Fed has already increased its key short-term benchmark interest rate 17 times since mid-2004. That's a lot of tightening, and the full effects of the higher costs of borrowing are still working their way through the economy. For now, it's enough, perhaps even more than enough.

The risks of too-high interest rates naturally are greatest for the economy's two most interest rate-sensitive sectors: real estate and automobiles, both of which depend heavily on buyer financing costs. Higher interest rates by definition mean buyers will pay more over the lifetime of the financing for a house or car even if the price of that house or car is unchanged. That's why interest rates naturally are an important factor in any buyer's decision to purchase a home.
Become a Member of Inman News

• Access 30,000 articles
• Special reports
• Reprint rights
• Audio content
• Members discounts

Sign up now!

Interest rates on mortgages haven't risen as rapidly as the Fed-managed short-term rate has, nor have they stuck at the rock-bottom lows of recent years. The average commitment rate on a 30-year fixed-rate mortgage hit 6.86 percent in late June, according to Freddie Mac's weekly survey data. That's still very attractive by historical standards. Thirty-year fixed-rate mortgages couldn't be had for less than 7 percent at any time during the 26 years from 1971, when Freddie Mac started tracking this statistic, to 1997, when mortgage interest rates began to drop back to lower levels, and surely no one (other than passbook-saving retirees) would welcome a return to the interest-rate climate of 1981-82, when fixed rates on 30-year mortgages soared as high as 17 percent.

Yet those cycles are now ancient history, and today's home buyers have become sticker-shocked by current mortgage rates in comparison with the 5 percent-plus mortgages that could be had in recent years. That's particularly true now that house prices are so much higher.

Interest rates on adjustable-rate mortgages, which enable borrowers to stretch their purchasing power, also are now higher than they have been in recent years and that likewise bodes ill for homeowners and housing markets. ARMs and other creative financing instruments are a risky business for borrowers and the hurt for those who can't afford higher monthly mortgage payments could be considerable if the Fed pushes rates higher than they are today.

The other real estate-related risks of too-high interest rates are many and legendary. They include slower or negative home price appreciation, fewer sales of new-built and existing homes, a crash in the volume of mortgage originations and refinancing, higher rates of foreclosure, a softening of new home construction activity, delays or cancellations of home remodeling projects, and an overall shrinkage in real estate investment capital.

Signs of these risks have surfaced in some of the nation's housing markets. Home sales, seasonally adjusted and annualized, in California in May totaled some 488,000, a decline of 21 percent compared with May 2005. New foreclosures nationally in May topped 92,700, an increase of 28 percent compared with the number recorded in the prior-year period. And a recent UBS/Gallup survey of some 800 investors found more than 60 percent of them expected worsened conditions in the U.S. housing markets in the next year.

Ben Bernanke, the new man at the helm of the Federal Reserve, has taken few missteps so far and appears to be a fast learner, which is exactly what's needed. But what's also needed are a willingness to learn from the historical record, a respect for the huge importance of real estate in the economy and the patience to measure the results of interest rate increases to-date before any decision is made to raise rates further, hold steady or even back off the rate increases of the last two years. The Fed's hint that it may now pause should be welcome news for homeowners and people whose livelihoods depend on healthy real estate, mortgage and homeownership markets.

The Fed's eye is rightly on inflation, and Bernanke and crew have been right to combat the threat of inflation aggressively so far. But now that rates are higher and now that real estate is a much larger sector of the economy than once was, the risk of economic pain is that much greater if the Fed over-reacts to inflationary pressures. Would smashed housing markets be preferable to higher prices?

Ventura co star 7.05.06

http://www.venturacountystar.com/vcs/business/article/0,1375,VCS_128_4822599,00.html

Builders and economists are reducing their forecast for the number of homes to be built this year in California as several large developments are preparing to come on the market in Ventura County.

Reacting to a slowdown in the market, homebuilders are adjusting plans to make sure there are enough houses for interested buyers — and no more.

Ventura County Star
"The Ventura County market is a little slower than it was last year, but Oxnard has always been a desirable place," said Steve Seemann, manager of the Riverpark Legacy joint venture in Oxnard.

Seemann said plans for the 1,800-home development have not changed and there are currently homes for sale. He said homes become available slowly as companies obtain building permits in small batches. About 189 building permits have been issued so far.

Seemann said he believes the slowdown is temporary, caused mostly by media hype about a real estate bubble.

The California Building Industry Association revised its outlook on June 21, saying it now expects home building to be 15 percent to 20 percent below 2005 levels, with about 170,000 to 180,000 homes to be built statewide.

The CBIA projects that Southern California will be strong, while the San Diego, San Joaquin Valley, Sacramento and Bay areas could have significant declines.

The UC Santa Barbara Economic Forecast Project is expecting slightly fewer homes to be built in Ventura County than last year.

Director of Economics Dan Hamilton said the Forecast Project is expecting from 3,100 to 3,300 homes to be built in the county this year. Through March, there had been 929 residential building permits issued in Ventura County.

Last year, there were about 4,261 permits issued countywide, including 1,500 by March.

"(This year) is going to come in a little lower, but not historically low," Hamilton said.

KB Homes reduced its financial forecast for the year on June 15, even though the company had sold 10 percent more homes in the six months that ended May 31 compared with the same period the previous year. Net income for the period was up 25 percent to $381 million.

"There is still strong demand in Ventura County and the San Fernando Valley," said Ray Gomez, spokesman for KB Homes. The company will start building shortly on The Meadows development in Fillmore, which is all two-story family homes with three bedrooms.

In a June 15 conference call, the company said it was going to try to make the construction process more efficient, reduce overhead and be more selective in land purchases in response to the changing market.

Gomez said the market was "normalizing." The company, he added, will be able to adjust easily because the homes are only built after there is a buyer lined up with a deposit.

Builders face financial risk by building houses on speculation that buyers will be looking to purchase.

Lennar Corp., one of the nation's largest home builders, was not far behind KB Homes in announcing a large second-quarter profit but with a similar reduced outlook for the year. Lennar is building the Harmony development in Ventura.

The company reported that it was "managing inventory well," although there had been more contract cancellations and the sales staff had been using more incentives and discounts.

Lennar President Stuart Miller said he believes buyers are waiting to see if there is a better deal coming.

"They have placed themselves on the sidelines awaiting a better price but remain ready to buy," he said in a conference call.

The revised forecast for new homes comes at just about the same time that the California Association of Realtors announced that it is expecting the pace of sales in existing properties to slow from its previous forecast.

Seemann said the slower resale market does have some effect on the sale of new homes, but RiverPark has many smaller homes or townhomes that might be attractive and more affordable to first-time buyers.

The development eventually will have 1,800 homes, including apartments and large single-family homes.

Currently, RiverPark has homes selling for up to $700,000 and some units designated affordable housing that are listed at $160,000 for people who qualify.