100 MILLION MORE IMMIGRANTS GOTTA LIVE SOMEWHERE... (via Brad S):

Housing: The Riddle of Rates and Prices: With real estate on the skids, which matters more to potential buyers: declining mortgage rates or falling home prices? (Peter Coy, 11/17/06, Business Week)

Conflicting data this week showed that the housing market, like a bull in the ring, is wounded yet still powerful. It takes an experienced toreador to discern whether the beast will succumb to the knife or come charging back. The course it takes may hinge on which matters more to buyers: falling interest rates (a big positive) or fear of falling prices (a big negative).

For now, at least, housing construction is clearly in a localized recession. The freshest evidence came on Nov. 17 from the Census Bureau, which announced that starts on construction of single-family homes plunged 14.6% in October, to the lowest level since July, 2000. On top of that, permits fell 6.3%, to the lowest level since December, 1997, indicating that construction could dip even further in the months ahead.

But that's not the end of the story. Buyers could still save the housing market, depending on how they react to current economic conditions. Mortgage rates, after rising at the beginning of this year, have dipped in recent months, from a peak of 6.80% on average for a 30-year fixed loan in July to 6.24% last month, according to FreddieMac. There's also speculation that the Federal Reserve could cut rates in the months ahead, if inflation is under control and the economy flags.

If buyers take heart from the decline in mortgage rates and step up to buy, the backlog of unsold homes could shrink quickly—especially with the production of new homes having abruptly fallen. That would put the market back on sound footing within a few months.

With insufficient supply to meet the growing demand and interest rates having to come down to meet deflation, there's no economic theory that suggests sales can slump for long.

Posted by Orrin Judd at November 20, 2006 8:15 AM