All through the later part of 2007 and the first part of 2008 consumer confidence began falling. The good news is that currently the reports of consumer confidence falling has ceased. The bad news is the falling home prices have not ceased. Today there were two separate reports released that were rather conflicting. One reports that economists point to an encouraging stabilization in consumer attitudes and the other reported on a continued erosion of the value of homes. This poses two entirely different views and understandings of the economy today creating unpredictable effects in the housing market.
Standard & Poor's/Case Shiller's monthly report states that the median price of a home fell a whopping 15.8 percent in 20 of the biggest metropolitan areas in May. This is right on the heels of a nearly equally steep drop in the prior month. Also reported by the national Association of Realtors; existing home sales for June declined 2.6 percent in May and 15.5 percent since June of 2007. Despite these reports, we are led to believe that consumer confidence is stabilizing.
In all of the 20 metropolitan areas that were surveyed, home prices were down in the month of May. Not surprisingly, the falling home prices match an increase in the nations foreclosure activity adding the over abundance of housing that is not moving on the market. This is making the prices of the homes go down. This would be great for those looking to buy homes; particularly first time home buyers, if the economy were not in a state that prevents people from purchasing new homes. Fortunate for some first time homebuyer, there are programs that are being created and others that are still in place to assist them in buying first homes. The first time home buyer may be the only ones celebrating, homeowners who must sell a home before purchasing a new home are not as happy.
Ordinarily home prices going down are celebrated by people wishing to purchase a home; right now it is still spelling trouble for the economy as a whole. The decline of home value means a decline in equity. Homeowners who purchased their home recently might now find themselves "underwater", or owing more on the home than what the house is worth.
Over the last ten years the United States experienced a real estate boom where consumers could tap into the equity in their homes to pay for home improvements, education and other large dollar items which all served to fuel the consumer economy. Today with equity falling these loans are not being taken out and the fuel to the economy has lost its spark. But, by report consumer confidence has held for this month but according to the conference Board it raised less than a point in July. Never-the-less this slight raise was the first increase since December.
Anti Bailout : "The taxpayers should not have to foot a 700 billion dollar bill to bail out Wall Street"
Pro Bailout : "But if taxpayers do not bail out Wall Street the economy will fall apart and those same taxpayers will be hurt"
If we could be sure the bailout would work the second argument has some merit. While the bailout will certainly help the banks, the problem is we have almost no guarantee the bailout will help the real estate market and the general economy.
First let's look at some recent history of how the Fed has tried to help the troubled real estate market. The Fed usually attempts to lower mortgage interest rates to help the real estate market. By lowering mortgage rates houses become more attractive to buyers. In addition, with lower mortgage rates home buyers can buy more expensive houses with the same monthly payment. Therefore lower rates can help stop falling home prices. So it was not surprising in early 2008 the Fed cut the Fed rate. In normal markets lowering the Fed rate helps banks and causes them to lower mortgage interest rates. And following the Fed cut mortgage rates dropped to 5.5 for a period of time. If they had stayed down we might have averted some of the problems with the current housing crisis. But instead a few weeks later rates had jumped backed up to 6.2. Basically banks said thanks for the lower fed rates but we are not going to alter our mortgage rates.
In fact, over the next few months mortgage rates rose all the way to 6.6. The next big move was acquiring Freddie Mac and Fannie Mae. This was one of the largest government takeovers in US history. The move was risky because the government was providing insurance for trillions in loans. And it initially had a positive effect on the housing market. But a few weeks later AIG ran into financial problems. This dominated the news cycle. It was almost as if the government takeover of Freddie Mac and Fannie Mae never happened.
So the previous moves the federal government has made to stop the financial crisis have not worked. Should the 700 billion dollar bailout be different? It could certainly help the housing markets. But it might not. Lets look at why.
One of the benefits of the 700 billion dollar bailout has nothing to do with banks. It has more to do with perception on Main Street. The hope is that the bailout will restore confidence in the real estate market on Main Street.
In politics people often talk about news cycles covering up the last news cycle. Basically the last piece of news stays in people's minds until the next piece of news comes along. The Fannie Mae and Freddie Mac news cycle (and the billions the government will spend on it) only lasted until the next piece of news, which was about a week. While the 700 billion dollar bailout should restore some confidence in the real estate market, that confidence might only last until the next piece of news. And with things happening so quickly that news cycle might not last very long and given the current market the next piece of news will probably be negative.
The other benefit of the 700 billion dollar bailout is that the government is hoping to influence banks to start lending again. The idea is that by taking billions in toxic loans off the books for banks they will start lending again. The problem is that their is no guarantee this will happen. In fact, when the Fed lowered rates banks said thanks but decided that prospects for the housing market looked negative and continued to add restrictions to lending. In a similar fashion banks could say thanks for the 700 billion but we continue to see negative prospects in the housing market and therefore we will continue to have strict lending practices. But thanks for the 700 billion taxpayers.
Both Jennifer Stromsteen & Ki Gray are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Jennifer Stromsteen has sinced written about articles on various topics from Real Estate, Brain and Anger Control. J Stromsteen has many years expertise in the finance, real estate, and insurance industry. She contributes to various websites such as where. Jennifer Stromsteen's top article generates over 74000 views. to your Favourites.
Ki Gray has sinced written about articles on various topics from Debts Loans, Real Estate and Food And Drink. Escapeso real estate is a small brokerage in Austin Texas. Their realtors works with clients looking for . Their site offers a free search of the. Ki Gray's top article generates over 110000 views. to your Favourites.