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Housing Prices and Mortgage Rates Provide Holiday Hope — For Some

The week leading up to Christmas was relatively free of dramatic developments. With the government having exhausted many of the options at its disposal, there was just a steady drumbeat of continued negative economic news. Meanwhile, mortgage rates slipped down a little further, exploring new record-low territory. Those lower rates take on greater significance with the slide in housing prices looking like it may actually be bottoming out in some areas.

The beat goes on

The holiday break may be just the thing for Federal officials, who have been in a frenzy trying to find a quick fix for the economic crisis. The truth is that a quick fix just isn’t in the cards, and the aggressive fiscal and monetary policies pursued already may have unintended long-term consequences (such as inflation, and/or the Federal deficit acting as a prolonged drag on the economy). At the very least, it seems it would be wise to wait and see what effects actions taken so far will have before launching into a new round of measures.

The reality that there will be no quick fix was borne out by the latest round of economic releases, which saw unemployment claims jump while consumer spending declined. Even severe weather piled on, making a disappointing holiday shopping season all the more likely. This recession is already longer than either of the two previous ones, and looks like it has some staying power.

The consumer spending numbers are closely watched because of the hope that people will spend the U.S. out of recession. However, going a little deeper than the consumer spending numbers reveals that household debt burdens are still near the high end of their historical range. It is not realistic to expect a sustained recovery in spending until consumers have first paid down debt a little bit.

Help for consumers

Ironically, seeing consumer spending drop could actually signal that they’ll be paying down debt more quickly. As they do this, they could get some outside help from a couple of sources besides the government.

One source of help that has already clicked in is lower gas prices. The breaking of the oil bubble is probably the most positive economic development of 2008 (not that there was much competition in that category).

The second most positive development could be the drop in mortgage rates to record levels — potentially. The only reason for qualifying that statement is that so many home prices are now under water (i.e., below the remaining mortgage balance) that the owners can’t refinance. However, while overall home prices have continued to slide, the national numbers are skewed downward by the persistent trouble spots, such as the west coast and the south Atlantic area. In other areas, including the south-central U.S. as well as the mid-Atlantic and New England regions, losses have been negligible (less than 2%) over the past three months.

More stable home prices give home owners a chance to work their mortgage balances back below the value of their homes as they continue to make payments. As this happens, more home owners will be able to take advantage of lower rates by refinancing. Certainly, anyone who is in a position to do this should lose no time in shopping for mortgage rates.

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