Real Estate Outlook: State of the Economy

Here's how a top mortgage industry economist sees conditions in the market at the moment: It's all kind of "flat", says Orawin, senior forecast economist for the Mortgage Bankers Association of America.

What Dr. Velz was referring to were the latest big-picture, "macro" numbers on the U.S. economy that underpin the housing market: The gross domestic product or GDP -- all the goods and services generated in the national economy -- registered a zero point six (0.6) growth rate in the first quarter.

No question that's pretty anemic. But it's better than the negative growth predictions that had been made by many Wall Street analysts.

In the latest month, manufacturing production was better than just about anybody expected -- factory orders jumped by 1.4 percent in March. No big deal you say? Well maybe, but it was the first increase in factory orders we've seen in the last three months.

The employment picture was also better than projected. The US economy lost 20,000 jobs in the most recent month, which is not good. But Wall Street had forecast an 80,000 job loss number -- and the stock market took a nice bounce on the news of the smaller loss.

Plus, the national unemployment rate dropped to 5 percent from 5.1 percent.

On top of all this, the Federal Reserve did precisely what most analysts expected -- cut the short-term federal funds rate by another quarter of a point.

Now that doesn't translate into lower 30-year mortgage rates, but it is very welcome news for millions of people with home equity credit lines and adjustable-rate mortgages heading for payment resets.

The fed funds rate is now at 2 percent, and the prime bank rate is just 5 percent - which is outstanding -- and should eventually have a stimulative effect throughout the economy.

Mortgage rates also fell slightly last week. Average thirty year rates inched downward to 6.01 percent, according to the Mortgage Bankers, and 15 year rates averaged 5.5 percent.

All in all, things could be worse. And they could be better. We are all paying horrendous gas and food prices and that psychology diminishes consumers' appetites to buy and sell houses.

On the other hand, the underlying US economy is defying the pundits, hanging in there like a boxer who refuses to go down. Home prices and the cost of money are more affordable, and a number of local real estate markets are picking up on that combination -- and improving.

So: the economy may be flat. But considering the alternatives, flat looks relatively favorable at the moment.


Written by Kenneth R. Harney
May 9, 2008