As soggy as the outlook for home sales is already, might it get even worse if the economy takes a nose dive?  We’d rather not have to find out.  The Federal Reserve is doing what it can to avoid an actual recession with several dramatic reductions in shortterm interest rates. A recession has traditionally been defined as two consecutive quarters of negative economic (GDP) growth.

Economists are still split over whether we will have a recession or simply a slowdown in the rate of positive growth, a more benign outcome.  In mid-February, Fed Chairman Ben Bernanke told Congress that he sees the economy continuing to deteriorate (led by the housing market, big surprise) and hinted that the Fed was prepared to lower short-term rates even further, perhaps dramatically, in March.

Bernanke seems to be very aware of the drag and threat to the total economy posed by a troubled housing market and will be keeping an eye on how home sales respond to the rate moves. 

The reductions in short-term rates is good for those with adjustable rate mortgages indexed to 1-year Treasury bills or LIBOR (the London Interbank Offered Rate) and for home equity line holders with rates tied to the prime rate.  LIBOR had been sticky for a while, but has come down considerably recently.  For those seeking a new mortgage, especially a 30-year fixed-rate mortgage, the linkage is more mixed.  If the financial markets think the rate cuts will fuel inflation even as the economy stagnates (yes, the old stagflation worry is back), that could actually drive long rates, including mortgage rates, higher.In fact, 30-year conforming rates hit lows in late January before rising slightly in February, as Fed efforts and the stimulus plan gave the financial markets a boost of confidence.  The current negatives notwithstanding, there are also positives. 

Homeowners, if you have been thinking about a remodel or substantial renovation, you will find that contractors are uncommonly excited to take your call and give you an estimate.  Many will be happy to have work, so bids should be competitive, even bargain-priced.

An added benefit is that the slow pace of new home construction has sent the price of materials plummeting, so costs will be at their lowest in years.  You should be sure to have your financing arrangements firmly in place, but once you do, you will probably get maximum attention from your contractor, who will want to see the job completed quickly and satisfactorily in order to receive full payment. But just to be sure, see that the contractor is bonded to guard against a job half done.

If your dream is a newly constructed home designed to your specifications, you are also in an unusually favorable position. Architects, like other housingrelated businesses, are feeling the pinch and making themselves more readily available than in recent years, even for some remodeling jobs they would have declined a few years ago.
© 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Real Estate of VA, Inc., & Choice Finance®

    John Hodges, Choice Finance Corporation