According to the “National Association of Realtors”(TM), pending sales of existing homes are expected to “hold steady” in the months ahead. BIG surprise there. Pending home sales based on contracts signed in September fell 1.1%. This doesn’t sound too terrible but, they make no mention of the fact that it remains 13.6% below the levels from September 2005.
This doesn’t shock me because Alan Greenspan and his rate cuts and loose money ways set the stage for this 3 years ago. These rate cuts took the Fed Funds Rate (the rate banks charge each other for overnight loans) down to 1% and the Prime Lending Rate (its the rate banks charge their strongest commercial borrowers) down to 4%. This had the effect of pouring money into the economy in the form loose lending requirements. Dirt cheap money led to the creation of a watershed of hybrid mortgage product such as 2-3% ARMS, Interest Only loans and (my personal favorite) 40 year negative amortization loans (after paying for 10 years a person would owe more that the original amount borrowed. Virtually anyone who wanted to buy a home could get some type of mortgage.
What happens next is classic myopia. Cheap lending rates brought a deluge of buyers into the housing market and because of short housing inventory supply, drove the prices skyward. In some cases bidding the prices upward beyond the list price it was offered at.
I’m sure he (Greenspan) wanted to go out on a high note and that’s just what he did. The housing market boomed seemingly out of all control pricing the “first time homebuyers” out of the market (wages couldn’t possibly keep up). With delusions of grandeur the homeowner decides to sell at the best home sales time of the years, the spring of 2006. Dumping their properties on the market in record numbers and the buyers choked out of the market by escalating prices you could hear the air rushing out of the balloon.
The timing was perfect for Greenspan. He left his post with the economy soaring, looking like a hero as if he had nothing to do with it. Then, he went fishing. You just got to love it.
Today we’re left with rising inflation, lower wage growth, a devaluating dollar and the softest real estate market we’ve seen since the ‘90. There is currently a 7.5 month inventory of unsold houses that are listed for sale and rising. All I can say is, “Thanks Al.”
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