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Housing Market Commentary as of 11/22/07
by Peter L. Zachary, MAI

On this Thanksgiving Day maybe we should be thankful for the beginning of Federal legislation resulting from the sub-prime mortgage crisis. On November 7, 2007, the House Financial Services Committee approved the "Escrow, Appraisal and Mortgage Servicing Improvement Act" (H R 3837), introduced by Congressman Paul Janjorski, D-Pa, according to Appraiser News Online, published by The Appraisal Institute. This legislation would ban improperly pressuring appraisers to reach values and strengthen the appraisal regulatory structure. At the same time it would highlight the importance of professional designations. And the day before the House Financial Services Committee Chairman Barney Frank, D-Mass, introduced an amended bill, "The Mortgage Reform and Anti-Predatory Lending Act of 2007". This legislation would create a licensing system for residential mortgage loan originators, establish a minimum standard requiring that borrowers have a reasonable ability to repay a loan and will attach a limited liability to secondary market securitizers. This legislation will also expand and enhance consumer protection for renters of foreclosed homes and will establish an Office of Housing Counseling through the Department of Housing and Urban Development. This bill would bar mortgage brokers from getting bonuses to sign up borrowers for more costly loans and force lenders to verify whether consumers are able to repay loans.

These bills, if passed, would provide safeguards to protect families from lending abuses. In my opinion, these bills will provide stability to the housing market in the United States, allowing the hysteria of the sub-prime mortgage crisis to abate. No one can change the past, but we can take measures to protect homeowners in the future.

A few days after these bills were introduced, the New York Times reported on November 9, 2007 that the Chairman of the Federal Reserve, Ben S. Bernanke, told Congress that the economy was going to get worse before it got better. He warned that the economy was about to "slow noticeably" as the housing continues to spiral downward and financial institutions tighten upon lending. On November 21, 2007, the New York Times reports that the Federal Reserve expects economic growth to slow sharply next year due to the surge in oil prices and the tight credit markets brought on by the recent severe problems in housing and mortgage lending.

The firing of the Chairman of Citigroup, Chuck Prince III, and Merrill Lynch, E. Stanley O'Neal, shows the severity of the sub-prime mortgage crises. Merrill Lynch was forced to have an $8.4 billion credit loss and Citibank a $15 billion credit loss. According to Bloomberg.com, nine of the world's biggest banks and brokerages have written down at least $40 billion of bad loans and securities tied to mortgages.

These write downs are real monetary losses to these institutions. The effect on individuals is the next news you will hear in the coming months. Housing prices are down and foreclosure rates are up. People are less wealthy because the equity value in their homes have decreased. The November 8, 2007 issue of the New York Times states that "from 2004 to 2006 Americans pulled about $840 billion out of residential real estate via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist and Alan Greenspan, the former Federal Reserve Chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data". The New York Times continues that "in the first half of this year, equity withdrawals were down 15% nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one fourth, according to the Kennedy and Greenspan data". "A fall of 2% in consumption would be big enough to trigger a recession, said Christian Menagatti, load analyst for RGE Monitor, a consulting firm in New York".

Robert A. Barbera, chief economist at research firm ITG, states, "In the near term, though any dip in consumer spending is likely to sow pain, strong sales for American companies abroad may keep the United States out of a full-fledged recess, even if spending slips at home, but nonetheless it will feel like a recession".

In my opinion, people will spend less and this will have a negative effect on the economy, since consumers account for about 70% of all economic activity in the United States or about $9.8 trillion. This same articles in the New York Times states "The prospect of a slowdown, combined with the squeeze on households form higher oil costs, is sending shivers through the retail world, as apparel merchants, furniture dealers and electronic stores brace for the possibility that the all important holiday shopping season will disappoint. Automakers are bemoaning sluggish sales".

In my opinion, pressure on housing prices will continue.

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