Today, catching almost no-one by surprise, the existing home sales number dropped month over month – what did surprise us was the size of the drop; July’s existing home sales number was 27.2% lower than June. Many people, including some of the major news organizations and financial experts, are pointing fingers at the new homebuyer tax credit for creating what essentially has turned out to be a bubble in housing. Well, in reality, they didn’t create a bubble as much as move a number of home sales forward. For example, people who may have waited until September to buy a home, jumped on the tax credit and made their purchases earlier in the year. The hope, was that this short burst of activity would create some momentum and get the entire sector moving again. No such luck. As I have mentioned wayyyyyy to many times, until the fundamentals improve (employment, consumer confidence, rational lending guidelines), the housing market will not improve.

The thing that concerns me is not the admittedly awful financial news that seems to keep coming, but rather that it seems like we are at a precipice. While we have become somewhat used to weathering the storms of financial doubt and hardship, a large negative event that we aren’t expecting could truly send us into a tailspin. I won’t speculate on what that negative event could be, but a non-financial issue could be the straw that breaks this camel’s back. This is a danger because our financial system has become increasingly reactionary and much less proactive. People calling for the resignation of Summers & Geithner are doing so not because they are incompetent, but because they seem to be aimlessly shooting at targets rather than taking a measured approach to solving this economic mess.

On the mortgage rate side of things, we continue to see yields on MBS dropping, and then climbing back up. We seem to be bouncing back and forth between the usual flight to safety (when bad news hits the wires & stocks dive) and profit taking (once MBS prices hit the ceiling). Long term, this is a sign that rates will remain volatile, but “range bound”. At least for the near term, rates which were once unheard of will remain a huge attraction to potential home buyers. Like we said on Friday, housing is in rough shape, and may take a while to recover. 10 years from now, any first time buyer (that is able to buy now) will have one of those great cocktail party stories to tell “So, I bought this house for wait wait wait…..$155,000!, and oh yeah and my interest rate……4.25% !”

As we start to see employment and wages recover, we can expect that many Americans will begin to save to start rebuilding their wealth and lifestyle. The question is what they will do with their savings. Will they buy homes (there is a lot of chatter in financial sectors that homeownership is overrated)? Will they invest the savings (or will they have lost faith in the equity markets?). Will they spend it randomly on more “stuff”? Honestly, how many I-Pods does one person need? Will they be more comfortable taking on debt again? In order for our economy to move forward, there needs to be a good amount of all of these: savings, spending, investment, and debt. Too much of any of them will push us back into the proverbial ditch.

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Geoff Boyd – PrimeLending – Clackamas, OR