Housing's Next Leg Down

Lane Oatey | Getty Images

I realize everyone is glued to the stock ticker today, watching their personal net worth fall yet again; I know this because every time I wired up to do a live shot on CNBC today, my "hit" was "killed" at the last minute because the Dow dropped again.

But it is precisely on days like this that we have to focus on how it all affects housing; stocks may fill our 401K's, but our homes are (or were) our single greatest investment.

The drop in the stock market was preceded by a huge drop in mortgage interest rates, and it will likely be followed by one as well. The overnight average last night on the 30-year fixed hit 4.35 percent on Bankrate.com. Economic uncertainty pushes Treasury yields down, which in turn pushes mortgage rates down. Tomorrow we get the jobs report, and my guess is that it won't be particularly stellar either.

So I was all set to talk on TV today about how mortgage rates, even this low, won't help the housing recovery significantly (sure, higher rates would hurt) because a) we've been at historically low rates for quite some time now, and b) rates are not the most important decision-making factor for consumers today. We had a great conversation about this yesterday on the blog, so I took it further to ask some mortgage professionals.

"Interest rates used to be a much bigger driver in terms of people getting into the real estate market and thinking that now is the time to buy," says Melissa Cohn of Manhattan Mortgage Company. "I think that people have become more sophisticated and are more concerned with what's going on in the economy, what's going on with the real estate market, are we going to go back into another recession?"

Today's consumers are more focused on still-falling home prices, and we got a slew of data on that this week as well. Clear Capital reported a 7.9 percent annual drop in home prices; this after CoreLogic reported a 6.8 percent drop yesterday. I tried to get an explanation as to why the two reports differed, but all I could glean was that there are different "models" and Clear Capital's includes more recent data. Both reports beamed that home prices were improving month to month for three or four months, but of course that's seasonal and already turning opposite.

I can't say this enough…prices lag sales….on the way up and on the way down. So we saw price improvement last fall after sales were juiced the previous six months by the home buyer tax credit. Then sales fell off, and they never really recovered in the Spring as many expected. Why? Because the jobs recovery was and is not strong enough to support it. So now, big surprise, prices are falling again.

"A weaker economy means a weaker housing market," says economist Michelle Meyer at Bank of America/Merrill Lynch. "We are revising down our forecast for housing sales and starts over the next year and a half, and now see downside risks to our home price forecast." That forecast is for a further 5 percent drop in home prices through next year.

Of course there are always the eternal optimists, who somehow think that all the recent turmoil in the government, domestic and international economies and the still-cloudy future of mortgage finance will not phase today's war-torn consumers:

"No, I haven't changed my housing outlook. At least not yet. Yes, the stock market drop isn't helping, but so far this is still a garden variety correction," says Mark Zandi.

Until tomorrow...

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