Mortgage Market Trends for week ending December 17, 2010



Much ado was made about a CoreLogic report on foreclosures this past week. The headline went something like this: “The number of U.S. homes worth less than the debt owed on them dropped in the third quarter.” That would seem to get the spirits rising, until you read past the first paragraph and discover the improvement was largely due to mounting foreclosures rather than rising property values.

Still, the report offered some hope, noting that 22.5 percent of homes with mortgages, or roughly 10.8 million units, were underwater at the end of the third quarter, which is better than the 23 percent, or 11 million homes, reported to be underwater at the end of the second quarter.

We’ll offer our usual caveat with national numbers: they rarely pertain to any particular local market. Indeed, the usual suspects – Nevada , Arizona , Florida , Michigan and California – heavily skew the numbers on negative equity. CoreLogic reports that 67 percent of Nevada homes with mortgages are underwater – an incomprehensible amount to those who reside in cooler, damper environs.

We have two options for reducing negative equity: price appreciation or disposition. The aforementioned five states will likely rely more on the latter. However, that doesn’t mean that everyone is doomed to the same fate. At the least, price inflation – one of the Federal Reserve’s stated economic goals – will eventually seep into the housing market to stabilize prices.

Homebuilders will continue to suffer with foreclosures and negative equity, which is why sentiment among this group continues to dwell in the basement, and will likely continue to dwell there for the foreseeable future. This despite the Commerce Department reporting that housing starts rose 3.9 percent, to a seasonally adjusted annual rate of 555,000 units, in November. Unfortunately, permits decreased by 4 percent.

Homebuilders are also less than thrilled with mortgages rates. reported that rates on the 30-year fixed-rate loan hit 5 percent nationally – the highest in seven months. With all due respect to homebuilders, we don’t view rate increases as being all bad. Yes, it has increased teeth gnashing by those borrowers waiting for 3.5 percent mortgages, but rate increases are a sign of economic improvement. A stronger economy makes business investment more attractive, thus drawing funds away from bond markets. The result is lower demand for bonds, which translates to a drop in bond prices and a rise in yields and interest rates (which is good for savers, by the way).

The best advice we can offer at this point is to lock in today’s rate. Admittedly, we could see a pullback, but we wouldn’t anticipate it being much of one. Too many indicators point to a higher-rate environment.


Staying Ahead of the Trend

People are naturally attracted to trends: the longer a trend has been sustained, the more likely they believe that trend will be sustained into the future. It can be a misleading way of perceiving markets, for often it is the exact opposite: the longer a trend has been sustained, the more likely it will reverse.

The problem is that impending change is often imperceptible, though it is there. Simply vet the data over the past few months, and you can sense a change. Retail sales are rising; economic activity continues to build, evinced by Federal Express’ bullish outlook; and more businesses are planning to hire, evinced by a Business Round Table survey that finds that 45 percent of CEOs plan to hire within six months — the highest percentage for that group in eight years.

That said, this remains a favorable environment for homebuyers, investors, and borrowers. We all prefer to buy low and sell high, but we can buy low only when things are on sale; things are on sale when pessimism rules, as is still the case today. However, when economic indicators have trended higher and optimism rules, nothing is on sale. Sure, it feels better to buy when everyone is optimistically inclined, but doing so is rarely profitable over the long run.

Graph Courtesy from NY Times in an article by Lynnley Browning  December 19, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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