National housing slump continues, but interest rates stay at historic lows

City Homes

Don Debat

At the halfway point of 2007, experts are still trying to figure out if the nation’s housing slump is on its way to becoming a bust.

The supply of existing homes for sale nationwide has reached the highest level since 1992, according to the National Association of Realtors. While sales of used homes countrywide are down 10.3 percent over the past year, Chicago area home sales are off 20.7 percent.

The ballooning housing supply eventually will put downward pressure on prices, analysts say. However, the median sales price has dropped only 2.1 percent nationwide in the past year, according to the NAR.

Despite reports of spot declines of up to 10 percent, and an abundance of developer incentives and giveaways, home prices in Chicago appear to be holding their own.

Undoubtedly we are in a housing downturn, but it is a far cry from the bust of the Great Depression, when the average price of a home plummeted 24 percent between 1929 and 1933.

With home sales slumping and 10-year Treasury note prices seesawing between 4.87 percent and 5.32 percent during June, economists had trouble getting a solid read on the direction of both the housing market and interest rates.

Following the Federal Reserve Board’s decision to keep the federal-funds rate unchanged at 5.25 percent, benchmark 30-year fixed mortgage rates eased a bit in early July after peaking at nearly 6.75 percent in mid-June.

Freddie Mac’s Primary Mortgage Market Survey pegged benchmark 30-year fixed-rate mortgages at an average of 6.63 percent in early July. Last year at this time, 30-year fixed home loans averaged 6.79 percent.

“Long-term mortgage rates continued to move lower, reflecting in part a moderation in core inflation,” said Frank Nothaft, Freddie Mac vice president and chief economist. He also observed that a sustained moderation is yet to be seen.

Beginning in mid-2004, the Fed methodically raised short-term interest rates 17 times over a period of two years. The series of quarter-point interest rate hikes were designed to make sure inflationary pressures remain under control. The federal-funds rate has held at 5.25 percent since June of 2006.

With recent rate declines, a 6.63 percent home-loan rate is only 1.42 percentage points above the 40-year historical rock bottom of the market – 5.21 percent in June of 2003, experts say.

And only about eight years ago, in August of 1999, lenders were quoting 8.15 percent on a 30-year fixed mortgage.
Here’s another reason to appreciate today’s historically low rates: consider what banks and mortgage lenders were charging in the early 1980s. According to Freddie Mac, benchmark 30-year mortgage rates peaked at a whopping 18.45 percent in October of 1981 during the last great recession. Rates fell below 10 percent in April of 1986, and then bounced in the 9 percent to 10 percent range during the balance of the 1980s.

Long-term mortgage rates were a very affordable 5.81 percent to 5.94 percent between 1963 and 1965. In 1966 and 1967, borrowers paid an average of 6.3 percent to 6.4 percent. Prior to 2003, rates last dipped below 6.5 percent in January of 1968, when the national average hit 6.41 percent.

Between 1971 and 1977, the now-defunct Illinois usury law held rates in the 7.6 percent to 9 percent range. Through a series of dips and up-ticks, rates have averaged 5.21 percent to 8.4 percent over the past 12 years.

Real estate columnist and media consultant Don DeBat has written about Chicago area housing and mortgage markets since 1968. He is chief executive officer of DeBat Media, Inc., www.DonDeBat.net.

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