Mortgage Market for Jan. 10, 2011

Keeping you updated on the market!
For the week of

January 10, 2011


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MARKET RECAP

Home prices are the leading concern as we begin the new year. Clear Capital reports that prices dropped 4.1 percent across the nation in 2010, and it was a volatile decline at that. Values declined 5.3 percent over the first 12 weeks of the year, then spiked 9.7 percent through mid-August, only to drop 9.4 percent through year's end. Clear Capital sees prices dropping another 3.9 percent through 2011.

Another analytics firm, Altos Research, also reports less-than-encouraging pricing news. According to Altos, home prices dropped 1.6 percent in December, with new listings actually hitting the market lower than that. The good news from Altos is that prices will “likely” increase modestly as we head into the spring season. Shadow inventory remains a concern, but Altos reports that inventories were cut nearly 6 percent in the 10 largest markets in December.

The latest spat of negative data doesn't mean we should throw in the towel on price stability, or that buyers should wait for lower prices before taking the dive into the housing pool. The heavy across-the-board discounting is over. Changes in prices going forward will be incremental and specific to local markets – some markets will see additional discounting, some won't.

What's more, markets are dynamic: money saved from any additional discounting could easily be offset by mortgage-rate increases. Goldman Sachs expects that the Federal Reserve will end its second round of quantitative easing in June, and that 10-year Treasury yields (a benchmark for 30-year mortgage rates) will climb to 3.75 percent by year-end, and then advance to 4.25 percent by the close of 2012. The historical average spread between a prime 30-year fixed-rate mortgage and the 10-year Treasury note is around two percentage points, which means if Goldman Sachs proves accurate on its prediction, we could be looking at 5.75 percent 30-year loans this year and 6.25 percent loans in 2012.

Of course, a forecast is no sure thing. In fact, forecasts are often wrong, but there are mitigating circumstances to consider. A majority of top decision-makers at the Federal Reserve believe that concerns over falling prices have eased and that inflation will gradually rise. Recent data support that belief: employment is improving – ADP Employer Services reports that 297,000 new private-sector jobs were created in December, triple the consensus estimate; manufacturing has expanded for 17-consecutive months; stocks continue to trend up; and rising food, energy, and commodity prices are stoking inflation fears.

Our advice remains the same as it has for the past two months: get the mortgage application in, and, unless you have a strong gambler's constitution, lock instead of playing the floating-rate game. We don't think borrowers will be giving up much. Let’s remember that we are still within 50-basis points of a 50-year low.

Let's Not Forget the Other Half
Actually, it's much more than half. Most media accounts are peppered with sad stories of people who are under water or who are facing foreclosure because of job loss or because they simply took on too much house and too much financing. The fact is that the vast majority of mortgagors have a job and are current on their payments.

Many of these folks are underwater, to be sure, but most are not, so there is still plenty of opportunity for plenty of people to buy, invest, or sell. While there is currently some slack in demand, reduced prices and low interest rates should keep home purchases attractive. The market is now simply waiting on a robust recovery – most likely lead by job growth – to spur consumers into taking advantage of very affordable conditions.

A strong recovery appears to be at least a year, or possibly two, away. But as we've stated, if we wait for a strong recovery to be in full force, the bargains (and the low financing rates) will be gone. That's a lesson worth imparting to the half that is still fearful of the recent past or needs a consensus backing it before it will act.