|
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |  |
FEBRUARY 19, 2007
Why Housing Hasn't Hit The Skids Low rates are a major factor So this is the much-feared "housing bust"? Bust Lite is more like it. Existing-home prices are as high as they were a year ago, while sales have receded only to 2003 levels. The only extreme decline is in construction: Builders are trying to get rid of the houses they've already built before they put up more. The overhang of unsold homes could be back to normal by around midyear. The credit goes, at least in part, to low interest rates. Fixed-rate 30-year mortgages averaged a modest 6.2% in the last quarter of 2006—well below a decade ago. That, combined with income growth, means houses in most areas remain affordable even though prices rose more than 50% nationally in the past five years. The affordability index of the National Association of Realtors is still over 100, meaning a family making the median income can afford to buy a median-priced house. The market began gaining momentum in 2001 when the Federal Reserve started lowering rates to end a recession. Corporations cut back on borrowing, but homebuyers exploited the low-cost money. Says Citigroup economist Steven Wieting: "The housing sector acted as a bottom feeder, taking advantage of cheap capital flows." The surprise is that low rates are still keeping a floor under housing. Thirty-year mortgage rates are no higher than in June, 2004, even though the Fed has since pushed up the federal funds rate by 4.25 percentage points. It's the same in Britain, where long-term rates have actually fallen since 2004 despite short-term rate hikes by the Bank of England. No surprise: After a brief lull, Britain's housing market is booming again. Globalization and financial innovation are two key factors in keeping rates low. Investors know more about the loans they're buying, so they will pay more for them. "It's become a much more attractive asset class, hence more dollars are chasing the mortgage market, hence lower rates," says Bryan Whalen, a portfolio manager at Los Angeles-based Metropolitan West Asset Management. As recently as three years ago, he says, investors in mortgage-backed securities received two-page summaries of the portfolio. Now they get data on each loan. Credit default swaps, which let people bet for or against a bond or loan's creditworthiness, have also improved transparency. If investors bet heavily against an issuer's securities, its lending costs are driven up. "This pushes out the marginal lenders," says Whalen. That creates a healthier market—and ultimately, lower rates.  By Peter Coy
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2007, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
