Mortgage Market Update For February 7, 2011

MARKET RECAP

After getting off to a rough start in 2011, the data on housing has continued to turn for the better. This past week, Clear Capital's home price index showed that prices stopped declining in early January and increased for the first time since August. The change in prices, especially during a point in the year when sales are slow, is a sign that demand is returning. Even more encouraging, Clear Capital said that the slowing rate of sales of REO properties was the main reason for the price increase.

REO properties remain a market concern. We are all familiar with the distressed property overhang that weighs on prices. Clear Capital reports that in the fourth quarter of 2010, REO saturation increased 1.4 percent, but that is actually a drop from the 3.2 percent increase posted in the previous period. If the deceleration trend continues, Clear Capital says, home prices could be poised for future gains.

Of course, not everyone is on board with a rising-price environment. Fiserv expects home prices to decline another 5.5 percent nationally in 2011, though Fiserv also notes that three-fourths of the 375 metro areas it tracks will see prices stabilize by the end of the year, with all markets stabilizing by the end of 2012.

Our view continues to support more price-stabilization, with rising prices in certain locales. In fact, we expect that the most over built locales – Las Vegas , Phoenix , Central Florida – will see the most pricing improvement. There is no science behind our prognostication, just common sense. The sun-and-sand areas are still desirable, and they've suffered the most price depreciation since the financial crises began in 2007. We expect that they will likely post the best percentage improvement – albeit because they are coming over a very low base.

Mortgage rates moved off a very low base in the waning months of 2010, but they continue to hold steady, in that the prime 30-year fixed rate loan is still hovering in the 5-percent vicinity. Rates are better on some days than others, to be sure, but that's usually due to a surge in Treasury-security activity, which occurs when investors panic over some conflagration in a distant part of the world, most recently in Egypt .

However, conflagrations fade quickly and rates return to domestic influences, with inflation being the strongest influence. Price inflation is readily evident in oil, which has risen to over $100-a-barrel. Meld rising oil prices with growing consumer demand for all goods and services (an outgrowth of an improving economy) and an extraordinarily large money base and we are looking at the potential for wide-spread price inflation (which, by the way, will eventually become evident in housing prices).

The Power of Optimism

Our bias is toward optimism, and not because we like to indulge in wishful thinking. An optimistic outlook focuses the mind on searching for opportunities, which also tends to make obstacles that much easier to clear.

For the past year, we've been saying that opportunities abound: home prices are low, mortgage rates are low, the economy is recovering. That's good and bad news. Good in that the economy is improving, bad in that the best deals are fading away. For those with the courage to buy or invest when the popular financial media are predicting the end of the word (and fewer in the media are doing that these days), the rewards nearly always pan out over time.

And time is a key factor to focus on; real estate isn't about flipping, which is a niche market for sharp-penciled types who are obsessive about time-management, contractor-oversight, and cost control. Most of us aren't obsessive. But real estate still works. The key is to get in at a low-base price and finance at a low interest rate; positive cash flow is easier to generate (for investors) and price appreciation will likely be realized when it comes time to sell.

Deals are still available if you are willing to seek them in negative situations, because the long-run opportunities don't avail themselves when the outlook is the sunniest. Today, pessimistic commentators continue to lament what the foreclosure overhang is doing to the market. The optimistic actor, meanwhile, continues to focus on the opportunities the overhang is creating, because he knows the overhang and the opportunities will not last forever.