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By John W. Schoen Senior Producer
msnbc.com
updated 9/3/2007 5:30:30 PM ET 2007-09-03T21:30:30
COMMENTARY

Last week's news that housing prices have fallen for the 12th consecutive month has many readers wondering when prices are going start going back up again. And just what will it take to turn them around?

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When will the drop in housing prices stop? And how?
— Alex J., El Dorado Hills, Calif.

Forecasting the long-term direction of any market — stocks, bonds or housing — is a perilous endeavor.  But it seems pretty clear that the housing market has not yet hit bottom.

The recent slide in housing prices has been very moderate, but it’s only just begun — at least according to most widely watched data on both new and existing homes. As recently as the second quarter of this year, home prices were still up 3.2 percent from a year ago nationwide, according to Office of Federal Housing Enterprise Oversight. And after years of double-digit gains in many markets, home prices nationwide are down less than 1 percent, according to the National Association of Realtors. 

But there’s evidence that prices are falling faster than the numbers indicate. Many builders are adding “free” improvements like fancier kitchens and bathrooms to avoid cutting their asking price. Sellers of existing homes are offering incentives — like paying the cost of repairs.

If the slump continues, it’s going to be harder for sellers to get their original asking price. For one thing, the wave of foreclosures is forcing banks and other lenders to put hundreds of thousands of homes on the market priced for quick sale — usually at below-market prices. Those sales then become “comparables” — used by appraisers and future buyers to determine how much a similar house is worth. That puts further pressure on sellers to mark down the price.

Each local housing market is different, and each transaction is unique. But there’s ample evidence that many sellers haven’t yet cut prices enough to attract buyers. The most telling sign is the level of unsold homes on the market, which as of July was more than double what is was when the market was roaring ahead.

That backlog is probably one of the best indicators of a market turnaround: As that number comes down, it’s a sign that prices have reached a point where buyers are coming back into the market in big enough numbers to clear the unsold inventory.

But that may take some time. One big reason is that many would-be sellers are sitting out the slump and waiting for a turnaround. If they see signs of the market stabilizing and list their homes all at once, the backlog of unsold homes could shoot up again — putting more pressure on prices.

No one can say how long this will take to play out. During the last two major housing slumps — in the early 1980s and the early 1990s — it took several years before prices and sales recovered. Earlier this year, some housing market watchers had been looking for an upturn by the middle of next year. But after the recent turmoil in the mortgage market and monthly data showing foreclosures still rising, some of those forecasts have been pushed back to a recovery in 2009.

A lot depends on whether the housing slump spills over to the broader economy and brings on a recession. Though the housing industry is clearly in recession now, the overall pace of job and income growth, and the level of consumer spending, has many economists believing that a “soft landing” is still likely.

But any such forecast is based on a very fluid set of conditions. The mortgage market is still not back to normal. The Fed may or may not cut interest rates. Congress is considering a series of measures to help those facing foreclosure keep their homes.

My brother and I are interested in investing in Treasury notes, through the help of our parents. Since we are 8 and 10, can you help us to understand? Can you explain the difference in the Treasury notes and bills, how these investments work, and how to purchase them?
— Natalie D.,Zebulon, Ga.

This is a terrific idea, Natalie. To show you how terrific it is: If I had invested $100 in Treasuries when I was 10, I’d have over $1,000 today. So the sooner you start, the sooner your money grows. And the longer you leave it alone, the faster you'll make more.

Treasuries are pieces of paper (or these days, electronic data in an account set up for you) that represent a loan to the U.S. government.  Like any loan, you get all your money back at a date you agree on when you make the loan (called the "expiration" date.) Until then, you get a regular interest payment. It’s kind of like rent: The person who borrows your money is paying you to use it.

Once every three months, the U.S. Treasury auctions off new bills, notes or bonds; everybody who wants to buy them tells the Treasury how much interest they want to get paid. The Treasury collects all these bids, starts with the lowest interest rates (it doesn’t want to pay any more than it has to), sells as much as it needs and then sets an average interest rate for that round of bills, notes or bonds. That rate never changes.

The main difference between bills, notes or bonds is the length of time they last. Treasury bills (also known as T-bills) only last for up to 26 weeks; notes last for 2, 5, and 10 years; bonds last 30 years. The other difference is that you usually get a little more interest the longer you agree to lock up your money.

One reason for that higher rate is that if you hold long-term Treasuries, there’s a risk that inflation will cut the buying power of your money. The dollars you get back from a Treasury bond in 30 years won’t go as far because inflation will have raised the prices of the things you want to buy. That’s why you always want an interest rate that’s higher than the rate of inflation.

Though Treasuries are about the safest investment you can buy, you can lose money. If you decide you need your money back before your Treasury expires, you can sell it someone else. But if interest rates have gone up, your Treasury won’t be worth as much as a new one: Investors would rather get the higher rate from the next auction. To make up for difference, you’ll have to sell for less than the full value — also called par value. (If rates go down, your bond is worth more.)

To buy Treasuries, you need to open an account directly with the Treasury on their Web site or through a brokerage. But you’re going to need your parents help to get started; until you’re 18 years old they have to open an account for you.

Don’t forget that interest payments — like any other type of income — are subject to taxes.  But we saved the best news for last. If you’re under 18, there’s a special rule called the “kiddie tax” that lets you keep $1,700 in interest in any year — without paying taxes. If you earn more than that, you have to pay taxes at the same rate as your parents.

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