US interest rates may fall

Home inventory grows
Price retreat forecast with record volume. While some economists see a sharp turn, others say that if the job market is healthy, demand will stay.
By Aldo Svaldi
Denver Post Staff Writer

U.S. homeowners are trying to sell 4.42 million homes, a record inventory that could push prices lower in coming months.

Some economists are going as far as to predict that median home values will decline next year for the first time since the 1930s. A. Gary Shilling, an economist based in Springfield, N.J., predicts home prices nationally will turn negative by year’s end and move sharply south in 2007.

Most other economists, however, think the real estate market will come in for a soft landing as it makes a necessary retreat from record-high levels of activity, cushioned by strength in other parts of the economy.

“The best predictor of home sales and housing activity is employment. If the job market remains pretty good, then the demand for property won’t fall completely away,” said Carl Tannenbaum, an economist with LaSalle Bank in Chicago.

The National Association of Realtors is forecasting that median home prices will rise nearly 3 percent next year. Home prices in Denver continued to rise at an annual pace of 2.7 percent in the second quarter, although the market struggles with a near- record 31,664 unsold homes in August.

Appreciation of home values has begun to slow throughout the Front Range. In Weld County, home-resale prices are actually moving lower. They dropped 0.35 percent in the second quarter compared with a year ago, according to the Office of Federal Housing Enterprise Oversight.

The weakness in the housing market and a slump in commodity prices have made it less likely that the Federal Open Market Committee will raise interest rates when it meets Wednesday.

“There is no reason to expect anything other than no change in policy at Wednesday’s meeting,” predicts David Joy, chief market strategist with RiverSource Investments.

A growing number of economists think the Fed will leave interest rates unchanged for a period of time and then begin reducing rates starting sometime next year.

Goldman Sachs is forecasting that the federal funds rate, a key benchmark for overnight bank loans, will fall to about 4 percent by late next year from its current level of 5.25 percent, said Andrew Tilton, an economist with the firm.

“Housing-market weakness leads to both consumer weakness and labor-market weakness,”
Tilton said.
Goldman Sachs doesn’t forecast that the housing-market weakness will lead to a recession – defined as two consecutive quarters of negative economic growth. Shilling and some other economists, however, believe a recession is now unavoidable.

A recession would only worsen home-price declines, Shilling argues. Over the next two years, he said, “we are looking at a 25 percent decline in national median single-family home prices.”

Consumers have increased their spending 3 percent a year since the last recession ended in the fourth quarter of 2001 – far ahead of the 1 percent gain in real incomes, Shilling said.

They have had negative savings since the spring of 2005, fueled in large part by the spending down of home equity. Declining home values will cap that practice.

Another hit will come for consumers who took out adjustable-rate mortgages in recent years to stretch their finances. More than $1 trillion in mortgages are expected to adjust to significantly higher payments in 2007.

Those trends could make it only tougher for sellers who need to get out.

Ven Jayaram has tried for a year to sell his home in Highlands Ranch after moving to Florida to take a software job. He even lowered the price from $345,000 to $329,000.

Add in $40,000 in improvements, a $25,000 Japanese garden and the sales commission, and Jayaram estimates he will only break even after nine years of ownership.

“I left it in the hands of the Realtor. They keep telling me the market is slow. They keep asking me to drop my price,” he lamented.

Bloomberg News contributed to this report.

Staff writer Aldo Svaldi can be reached at 303-954-1410 or [email protected]

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