The Bridgewaters, Massachusetts

Looking Back

Interest rates ended up at an 8 month high on news of inflation and the Fed Beige Books report on "weak economic conditions."

In other news, Pending Home Sales were up in April for the first month since last October. While still down 13% from the previous year, NAR economists are predicting modest gains in the number of pending contracts over the next few months, then solid gains for the rest of the year and beyond.  Analysts are crediting sharply lower home prices for the positive news.

Looking Forward

The most important financial releases this week have to do with inflation data. Tuesday's PPI (Producer Price Index) and New Housing starts will be the most interesting.

If this Summer goes the way of recent Summers, rates will remain high until after Labor Day.

How Are Tightened Lending Practices Hurting the Real Estate Market?

Tighter lending guidelines are part of the reason for the dramatic downturn in the real estate market, especially for people with lower credit scores or hard to prove income.  The pendulum has swung hard in the opposite direction from the days when lenders were approving everybody and their dogs for just about anything.

This is the inevitable result of the collapse of the sub-prime mortgage collapse a year ago.  The current mortgage climate favors borrowers with good credit histories and traditional income sources, and this is likely remain this way for at least the rest of 2008.

The problem can be traced back to Wall Street.  When housing prices were skyrocketing, investors paid little attention to who was borrowing the money.  The feeling was that if the borrower failed on their loan, the foreclosed home would sell quickly for a higher price, and the investor would be paid off.  However, in a declining market, investors are afraid for being left on the hook for a vacant property and an unserviceable bank note.