Home Sales - NAR Report Bullish, but Will the Prices Be UP or DOWN from Here?

National Association of Realtors issued a report on Monday, May 4^th 2009, stating that the US Pending home sales rose from February to March of this year. The report further stated that seasonally adjusted index of pending sales for previously occupied homes rose 3.2% in March. . This index represents a measure of the demand for existing homes. This is the second consecutive month that the index has shown a gain. The index was at a record low in January. Also, it should be noted that the index currently is 1.1% higher than last year's level.

Housing prices have been on a downhill trend ever since 2006, the year when the housing market peaked. People have seen their home values fall by 10% to 40%, depending on their geographic location.

Does this report, released by National Association of Realtors, stating that US Pending home sales rose for two consecutive months, and is up 1.1% from last years level, mean that the housing prices have finally bottomed? Does this mean that we will see appreciation in house prices in the next few years?

These are very tricky questions that remain on everybody's mind. But no one can answer these questions, without a crystal ball.

The good news - the mortgage interest rates are at historic 52 year lows, in the range of 4.75 to 4.875% for a 30 year fixed rate loan. These low interest rates are bound to increase affordability drastically, thereby helping the housing market immensely.

The good news - in many areas of the country, we have seen the condo and town home prices drop down drastically, bringing down the monthly ownership cost within 10% range of rental prices of comparable homes in the neighborhood. Just to sight an example, a two bedroom, two and half bathroom town home with a loft, in Montgomery Woods community, in Princeton, NJ, is currently selling in the range of 260k, at approximately the same price levels of 2002-2003. Assuming someone puts 20% down payment to purchase this town home, the monthly mortgage payment, property taxes, association fee, would all add up to around 2000$ per month. The prevailing Princeton area rental rate for a comparable rental is around 2000$ per month, with the tenant paying all utilities, as per the standard practice in the area. Given that the monthly cost in owning this home is almost the same as the rental income that would be received by renting it out, it may sound like a screaming buy for investors. The town home and condo market across the nation have seen similar price drops, and could end up attracting investors back into the market. Generally, when the rental prices are within the 10-20% range of the total cost of owning a comparable house in the neighborhood, the house prices will stop going down further. This is very good news for housing, especially condos and town homes. This is clearly a sign of floor having been found in the condo / town home segment of the housing market, in many areas in the country.

The bad news - Obama is spending huge amount of borrowed money. Obama's policies of huge government spending, using money we don't have, using money that is borrowed from our future generation, will only mean that massive inflation will hit us soon, as soon as the huge amount of borrowed money starts pouring into the main street, from the government. Inflation is good for house prices to some extent. During inflation, prices of all goods and services, including the house prices, tend to go up. During inflation, housing prices will generally show some gain, until a point is reached, when the Federal Reserve starts hiking up interest rates to very high levels, to fight inflation. If inflation shoots through the roof, as is expected with Obama's uncontrolled spending, interest rates will most certainly shoot through the roof. When that happens, the house prices will start to go down. The extent to which it will go down will depend on how severe the inflation will be, and how high the interest rates will have to be increased by. This is all bad news, waiting in the queue, to hit the housing market as soon as it starts to recover.

One can only hope that the budget deficit that is being quadrupled by Obama administration, estimated by Congressional Budget Office to be 9.3 trillion dollars in next 10 years, is not going to create a massive inflation, necessitating huge interest rate hikes, which will most certainly ruin any housing recovery, as soon as it starts to happen.

One can only hope that the 700 plus billions in TARP spending, by both Bush and Obama administration, which rewards failure and punishes success, against the principles of capitalism, is not going to create a massive inflation, necessitating huge interest rate hikes, which will most certainly ruin any housing recovery, as soon as it starts to happen.

One can only hope that the billions being spent by Obama administration in the name of Omnibus bill and Socialized medicine, being spent to ensure that Obama's radical left wing voter base gets their agenda passed, is not going to create a massive inflation, necessitating huge interest rate hikes, which will most certainly ruin any housing recovery, as soon as it starts to happen.

One can only hope that the huge amount of spending by Obama, which exceeds the sum of all spending by all president's, from George Washington to George W Bush, is not going to create a massive inflation, necessitating huge interest rate hikes, which will most certainly ruin any housing recovery, as soon as it starts to happen.

"Yes, we can" only hope that these policies will not create massive inflation. "Yes, we can" only hope that these policies will not end up necessitating huge interest rate hikes. . "Yes, we can" only hope that these policies will not ruin housing recovery for decade(s). But any educated economist will tell that the reality is not what we will be hoping for in this regard.

Ref:

http://finance.yahoo.com/news/Pending-US-home-sales-up-32-apf-15118441.html?sec=topStories&pos=main&asset=&ccode=