Mortgage Market Trends for week ending May 13, 2011


MARKET RECAP had many in the media – from the Wall Street Journal, to Bloomberg, to the New York Times – talking this past week, and they were talking mostly about home prices.

Home prices, according to Zillow, posted the largest decline in nearly three years in the first quarter of 2011, with prices falling 3 percent compared to the fourth quarter of 2010. Zillow’s data also show that prices have fallen nationally for 57-consecutive months.

The economists tell us that prices are deteriorating because of the glut of foreclosed properties selling at a discount. Mortgage companies Fannie Mae and Freddie Mac have sold more than 94,000 foreclosed homes during the first quarter, a new high that represents a 23-percent increase from the previous quarter. More properties could be on the way: Fannie and Freddie together were holding 218,000 properties at the end of March, a 33-percent increase from a year ago.

This latest dour data on prices prompted many economists to recalibrate their forecasting models, pushing back their estimates on when the housing market will actually bottom. One economist, quoted at, said, “We aren’t even halfway through a 10-year transition in the housing market.” Zillow’s in-house economist believes prices won’t hit bottom before next year and expects that “they will fall by another 7 percent to 9 percent.”

Distressed properties are an issue, to be sure. The NAR reports that d istressed property sales accounted for 39 percent of all transactions in the first quarter, up from 36 percent a year earlier. While good for sales volume, distressed properties are dragging down prices. In the first quarter, the median existing single-family home price was $158,700, down almost 5 percent from $166,400 one year ago, according to the NAR.

The rise in the number of distressed properties means more lower-priced homes, more home owners with negative equity, and, thus, even more distressed properties. It sounds like a vicious circle, except it isn’t. Most sellers have reserve prices. They won’t sell their home at just any price, regardless if they’re underwater or not. That also goes for REO properties. People are rational; they want to maximize their returns, and maximizing returns often means remaining on the sidelines instead of selling.

We still don’t back down from our contention that prices are at or near their lows. Could the price drop a little further after a purchase? Yes, but that can happen with any investment. What’s important is where the investment will be seven-to-10 years from now. We believe that residential real estate will be higher, and possibly a lot higher.

We also believe that the housing market would be in much better shape today if more people capable and willing to buy could. We are speaking of overly tight lending standards. The average credit score on loans backed by Fannie Mae stood at 762 in the first quarter, up from an average of 718 for the 2001-2004 period.

Of course, we are interested in speaking with anyone who wants a mortgage who understands the unique opportunity to get a loan at a low rate and to buy a home at a low price. There is a lot we can still do, but there would be more we could do if the tethers were only reasonably lengthened.

The Great Protector from Inflation

Inflation is on many people’s minds these days, including ours. Investors are expressing the most obvious concern, revealed in their seemingly insatiable demand for gold and silver – two historical antidotes to the ill-effects of inflation. Both metals have nearly doubled in price over the past few years.

Real estate is another great protector. Returns on residential real estate have typically averaged a return that was 1-to-2 percent above the rate of inflation over the past century. That’s easy to forget, given the off-putting news on recent price declines. But the message is worth remembering, especially at a time when investors have been piling into richly priced gold and silver. We think real estate is the better value and the better protector from inflation at current prices.

Graph Courtesy from NY Times in an article by Maryann Haggerty May 12, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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