The last few weeks have seen some big developments in housing and credit markets, which continue to fight an uphill battle.  The Fed jumped in to assist JPMorgan in its buyout of Bear Stearns, which had been on the verge of bankruptcy.  Markets were inspired initially by the news, but were even more enthused when JPMorgan upped its offer to $10 per share on Monday.

Mortgage rates have dropped again as the recent .75 point Fed rate cut runs through credit markets.  Bankrate.com showed national average rates of 5.72% for 30-year fixed loans today (March 25).  This was actually down a bit from last week’s 5.66% market on the same day.  Mortgage products have dropped sharply since the Fed’s move, driven somewhat by hope of more cuts, after spending several weeks above 6% on average.  Home equity loans have actually become even more appealing.  Many home equity loans and lines of credit are now offered as low as 5% for excellent credit customers.  Credit card APR has also dropped on many card products.

While the credit markets are not out of the woods, the news has been a bit more upbeat overall, compared to housing news.  Housing data, for the most part, continues to suggest the slump will continue for some time.  There was some hope offered Monday when reports showed existing home sales went up in February.  In spite of this surprisingly positive news, sentiments quickly turned sour when January price reports showed a record drop in housing prices.  This is not a good sign heading into the traditionally busy spring home selling season.

The Standard & Poor’s/Case-Shiller index of home prices showed a drop of 11% from January 2007 to January 2008, for the 20 cities included in the report.  This was the biggest year to year drop in the two decades that the index has been used to monitor home prices.  While most major cities included saw drops, homes in Las Vegas and Miami were especially affected, with each seeing 20% declines in prices.  Charlotte was the only city in the survey reported to have a price increase, with its 1.8% rise.

The strong price drop, and its broad based effect, does not bode well for a 2008 recovery in housing.  Most realists had already expected this to be the case based on suggestions from the Bush administration and the National Association of Realtors.  These parties have both tried to communicate that late 2009, or 2010, were more likely turnaround points for the markets.

Some real estate agents, struggling with lowered commissions, are encouraging first time home buyers, or discount shoppers, to take advantage of the historically low market prices.  Wise investment strategy says the bottom is the best time to buy.  Psychologically, however, many people are hesitant to buy into a market flooded with bad news on an almost daily basis.  At some point, however, when conditions flatten and stabilize, market conditions could pick up very quickly.

Overall, Americans seem to be developing a stable mindset in the current economic environment.  While consumer confidence remains disconcerting, investors remain bold in the face of current data.  This suggests hope is still driving speculation as Americans wait for rate cuts and tax rebates to influence economic conditions.

On a separate note, national gas demand has slowed from last year at the same time.  This is surprising, given the fact that typical demand increases of at least one percent are expected based on simple population adjustments.  This slowing demand shows Americans may be doing more to avoid high fuel costs.  The impact of slowed demand could help slow progression toward the $3.50-$4.00 gas prices expected to come this summer.  Combined with financial investment moves and slight dollar improvement, it seems more and more like Americans do not want to sit back and let the economy crumble beneath them.  Instead, they want to take action.

Market Recap

US equities were motivated Monday by news that JPMorgan had upped its offer price for Bear Stearns shares to $10.  The Dow was up 187 points at close, after being up about 250 points earlier in the day.  It closed at 12, 548.  The NASDAQ and S&P gained 68 and 20.  Existing home sales rose unexpectedly, for the first time in six months, but home prices continued to drop in February.  Equities took a breather Tuesday following a stretch of several big trading days.  The Dow was down 16 points on the day, but the NASDAQ and S&P both gained, 14 and 3 points, respectively.  The home price drop in January took on more emphasis with traders.

Neil Kokemuller
Tuesday, March 25, 2008
7:47 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

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