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Realities of Real Estate: Big picture on real estate

Like politics, all real estate is local. As a result, we frequently stay pretty close to home in our coverage of housing. But the winds of change on the national stage still have a way of affecting how real estate will evolve in each and every community. Consequently, it’s often useful to take a step back and look at the big picture. By doing so, we can better understand how the broader trends and overall changes in our economy might shape our immediate market. Plus, national, and even global, political or monetary events have become so interrelated and/or codependent that seemingly unrelated activity can cause a seismic shift in what your house might sell for six months from now.

This week, we’ll take a look at what’s happening right now with national home sales, as well as the economic conditions that will affect those sales.

Existing home sales: On a monthly basis, the National Association of Realtors (NAR) tracks home sales. Based on those monthly sales, it then projects a national annual rate of sales. As of November, the NAR reported that existing homes were selling at the rate of 4.9 million homes per year. That’s down 4.3 percent from the previous month and 1.2 percent below November 2012. In fact, this measure of home sales has been falling for four consecutive months. The combination of a sudden jump in mortgage rates (from 3.5 to 4.5 percent for a 30-year fixed rate) and geopolitical (Syria), domestic (Obamacare) and economic (debt crisis and government shutdown) uncertainty clearly put a damper on the growth we saw for real estate earlier this spring. And just to give you some perspective: During the housing peak in 2005, the national annual rate of sales was over 7 million. However, that was abnormal; something about 5,000,000 is what we’re currently looking for.

New home starts: Another important barometer for assessing the health of housing is new home construction. When the real estate bubble burst, new home construction was decimated, partially because there was so much speculative housing built during the run-up. Therefore, it has been expected that new construction would be the last sector of housing to see a recovery. The seeds of that recovery seem to be taking root. In the third quarter of 2013, new housing starts were up 17 percent versus the same period year ago. But when you drill down in the numbers, the growth isn’t as strong as it sounds. Much of the new construction is housing being built for rent, and a smaller part of the increase is due to owner-built starts. Plus, condo construction is still near record lows. The real core for new construction is the owner-occupied, single-family segment. When we see those numbers tick up some more, that’ll be a surer sign of improvement for this part of the market.

The Fed: When you hear people talk about the Fed, they’re referring to the Federal Reserve, which is the central banking system for the United States. By its simplest definition, the Fed is where banks do their banking. When a bank needs to borrow money, it goes to the Fed. As a result, the Fed can have a dramatic impact on the economy, simply by virtue of how much interest it charges on loans. Currently, Fed rates are near zero, which inspires a lot of borrowing by banks and keeps rates on consumer loans low. The Fed also actively participates in the economy by buying bonds and securities. This is another way that it injects money into the system in hopes of spurring growth.

But the Fed is constantly walking a fine line. If it pumps too much money into the economy, that could create inflation. Conversely, if it turns off the money spigot by increasing rates or pulling back on buying bonds, that might let us slip back into another recession. In short, the Fed is a powerful influence on our economy and, in turn, real estate.

Last week, the Fed made some moves that created quite a reaction in the stock market. On Wednesday, the Dow Jones Industrial Average was up almost 300 points in response to Fed comments about how it intended to alter the nation’s money supply. At first, the Fed said it would cut back on buying bonds. Normally, that would be negative for the stock market, as well as mortgage rates. When the Fed buys fewer bonds, it typically causes mortgage rates to go up. But the Fed also communicated that it would extend the time frame for keeping interest rates low. Originally, the Fed planned to let rates rise when unemployment got below 6.5 percent. Now, it will maintain rates at current levels so long as inflation remains low. That assurance of low rates is what sent the stock market skyrocketing, and it should also help keep a lid on mortgage rates.

In sum, we’re still climbing a wall of worry, but the Fed has apparently walked the tightrope in a way that will wean us off its supply of easy money without shocking us back into recession. For real estate, that signals the prospect for slow, but continued growth over the long run.

Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is McWilliams@BobDonna.com.