Summary (click here for full report)
Sales activity has been down significantly, but home prices have declined only minimally in the
Inflation appears to be contained. Both the headline and the core consumer price index decelerated to 2.8% and 2.1%, respectively, over the past 12 months to September. Better yet, most economists anticipate a further deceleration of inflation in 2007. Such an outcome could well lead the Federal Reserve to cut the federal funds and prime rates down the road. A federal funds rate cut is no guarantee of a fall in mortgage rates, but the signal that inflation is contained will force bond buyers to demand lower inflation premiums, and hence, lead to lower mortgage rates as well.
With job additions continuing and mortgages rates hovering at about 6.4% as of early October 2007, the housing market is poised to slowly climb back. If, however, mortgage rates were to rise to 7.5% or higher, then the housing market would continue to limp along with the possibility that home prices and overall housing wealth could stagnate. If rates were to move lower, then the market will recover at even a quicker pace.