Why consumer confidence is key to recovery

I don't know what was more exasperating: the number of commercials during recent sporting events telecasts or the fact that most of the paid interruptions were approved by political candidates. Can the pace possibly slow before November?

What we know for sure is that there will be a different person in the Oval Office, and many people believe that will most likely benefit housing. According to a study commissioned by Move Inc. and conducted by Harris Interactive, 44 percent of the population believes the housing market will improve when the new U.S. president takes over.

Because housing is cyclical, that's a fairly safe bet. (We are at least two years into a decline after a long upswing and the new president conceivably could have eight years to get it done). Some markets will take longer to recover, however, especially those in south Florida, southern Nevada, California's San Joaquin Valley and Phoenix-Scottsdale, Ariz.

"Consumer confidence tends to rise whenever there is regime change in Washington, and this should be especially true in 2009," according to John Tuccillo, former chief economist of the National Association of Realtors and one of the housing industry's leading analysts. "For housing, however, the current downturn needs to run its course. Some markets will improve before the election, some after and some not until the end of 2009."

The Harris survey indicates a strong underlying demand for homeownership. Nearly half (41 percent) of current homeowners plan to purchase a home again, while 80 percent of renters intend to buy a home at some point in the future, with 47 percent planning a purchase within the next five years. More people will do so for space-related (26 percent) and life-stage-change reasons (17 percent), such as having children or downsizing to a smaller residence.

Most home buyers are willing to make substantial sacrifices to save and earn extra income for down payments, and will compromise on features and amenities to acquire an affordable home, the survey revealed. Many of their choices may reflect changing values, including a growing concern over the environment, the importance of community features and the rising cost of fuel.

About four out of five home buyers say they face barriers to buying a home in the current market. The greatest single barrier is high home prices, a concern that was much higher in the West than in the South or Midwest.

Affordability is not just about prices -- it is significantly influenced by interest rates. What is curious is the misguided notion that mortgage interest rates never rise during an election year. In reality, for the past 40 years, the chances of interest rates declining during a presidential election year have been poor. While there are fluctuations depending on the type of loan and the terms and the month the loan was written, the truth is that mortgage rates tend to go up more often than they go down during presidential election years. In the last 10 presidential election years, the interest rates tied to the 10-year Treasury-bond rate went up seven times and dropped three times (by less than a half-percentage point).

Thomas French, former president of the Mortgage Bankers Association of America and a man who steered clear of ambiguous, middle-of-the-road statements, told me before the 1988 election: "I don't think anything as puny as a political party or candidate can move mortgage rates in this world. They may hope, but it won't happen."

Most home loans are now sold as long-term securities on the international market to a variety of investors. They, not local bankers, now control long-term interest rates. In a capsule, things are so much more complex and different today. Local bankers no longer dominate the financial landscapes they serve. For example, years ago when the corner banker had plenty of cash in deposits, he typically lent money at a cheaper rate. Now, there's a definite international influence.

If the Saudis decide to hold down the price of oil, it will affect what you pay at the pump -- and probably what you pay for a home mortgage. This move typically has nothing to do with a specific political party in the United States. Even the Federal Reserve Board doesn't have the long-term power to keep rates down like it once did. It does react to harness and stimulate the economy as it sees fit, but other countries now have to cooperate.

Tuccillo pointed out that the United States pulled out of recessions in 1993 and 2001 when the White House welcomed new occupants. He believes the "election economic bump" indicators will begin to surface soon because the autumn consumer confidence figures are expected in the next several weeks.

"Both candidates are offering economic programs that will expand the role of the federal government and thereby stimulate the economy," Tuccillo said. "The Obama platform appears to be a shade better in that it would help redress the maldistribution of income that has handicapped the middle class. Most of the McCain program is a continuation of the Bush economic policy."

Perception can move economic mountains. If Americans feel good about the economy and the future, a housing resurgence could easily follow -- regardless of who becomes president.

To get even more valuable advice from Tom, visit his Second Home Center.

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