"Never let a serious crisis go to waste." Rahm Emanuel, chief of staff for President Obama, said this in November of 2008 as the financial crisis was in full swing.
The crisis in financial markets today is centered in Europe. Prospective homebuyers in Idaho can heed Emanuel’s words and take advantage of a financial panic that has significantly lowered the cost of owning a home.
The value of the euro relative to the U.S. dollar is 10 percent lower since early April. Euro selling pressure continues as investors remain skeptical of the government aid package for Greece and worry that the problem will spread because of excessive budget deficits in many other countries.
During debt crises like these, global investors move their capital to the relative safety of U.S. government debt. Prices for the 10-year U.S. Treasury note are up strongly since the euro crisis began, reducing the interest rate to 3.2 percent this week from near 4 percent seven weeks ago.
Yields on this benchmark 10-year Treasury note drive interest rates on mortgages. It is not a direct relationship, but as Treasury rates fall, the cost that banks and other lenders incur to fund a mortgage declines.
The average interest rate on a conventional 30-year, fixed-rate mortgage fell below 5 percent this week compared to more than 5.5 percent last June. This difference in borrowing cost means that homes are roughly 6 percent cheaper for many buyers than they were last summer.
Add this drop in financing costs to the high level of properties for sale, due to foreclosures and overbuilding, and more prospective buyers undoubtedly enter the market.
As Sandra Forester reported for the Idaho Statesman earlier this month, the number of homebuyers in the Treasure Valley nearly doubled in April as tracked by Intermountain Multiple Listing Service. Greg Manship, the CEO of Intermountain, is quoted as saying these increases will continue despite the expiration of an income tax credit for homes. The outlook is good because of positive trends in the job market and overall economy.
Idaho is seeing good news on the employment picture. The state's unemployment rate is at 9.1 percent, declining faster during April of this year than at any time since 1983, the nation’s last big recession.
Boise Cascade reported another operating loss for the first quarter of this year as new residential construction remains weak. But the company should see increased demand in the near future because housing starts were 17 percent higher for the same period.
The U.S. Census Bureau reported last week that U.S. building permits in April were up 15.9 percent over the same month in 2009. New construction, or privately-owned housing starts, was 5.8 percent higher than the previous year.
Unfortunately, there are no free lunches. The good news for housing is only a short-term story. Global investors are in a panic because the longer-term prospects for future growth are diminishing.
Lower interest rates may be a positive for consumers, and especially homebuyers, but excessive government debt levels and the declining value of the non-U.S. currencies mean economic growth around the world will be lower over the next decade or more.
If you are thinking about buying a house you may not want to let this crisis go to waste. No such luck if you are a saver, not a borrower.
If you are saving for retirement expect to save more or take more risks to get where you want to be financially. The financial markets are forecasting returns on long-term investments like bonds and stocks well below average.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.