Update for Feb. 14, 2011

February 14, 2011


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MARKET RECAP

When housing-sector pundits spoke last week, they spoke mostly about foreclosures and pricing. RealtyTrac reported that lenders repossessed over 78,000 properties in January, down 11 percent from a year ago, but up 12 percent from December, thus implying that any improvement was an anomaly due solely to the foreclosure moratorium. Therefore, we should expect more inventory to hit the market, and more inventory means lower prices if demand fails to keep pace.

That wouldn't be good news; Zillow reported that home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009. Zillow's price data corroborates recent data from Case-Shiller and the Federal Housing Finance Agency, which shows prices are backsliding.

That fear is that sliding prices mean an increase in negative equity, which is already a concern. Zillow reports that 27 percent of borrowers were upside down on their loans in the fourth quarter of 2010, up from 23 percent in the third quarter. An increase in negative equity could mean more foreclosures, which means more inventory, which means more pricing pressure. You get the picture; it's a vicious circle.

However, it might not be all that vicious. We are talking about national averages, after all. In the past, we've offered the example of Warren Buffett, Bill Gates and 10 of us ordinary-folk in a room. If you were to average the wealth, it would suggest that everyone in the room is a billionaire, which is why averages can mislead. CoreLogic produced a table of the counties with the most negative equity, and it was heavily concentrated in Nevada , Florida , and the mid-inland regions of California .

The national data might be alarming, but it is likely irrelevant to your neck of the woods. Take Denver , for example: The Denver metropolitan area reported that the median price for single-family homes increased 7.1 percent year-over-year in January, while listings increased 5.7 percent. Denver hardly resembles the national averages, which is the case for most local markets.

The mortgage market is another matter. Lending is homogeneous; there's not much difference between a prime 30-year fixed-rate loan in Texas and one in Pennsylvania . Supply and demand and sources of financing are unique variables, to be sure, but the differences tend to be less than 40 basis points. A lot of what happens nationally (and internationally, for that matter) influences prices locally.

That said, whether someone lives in Texas , Pennsylvania , or anywhere else, rates are moving higher. This past week they hit a 10-month high. We doubt that they will reverse course any time soon, given the outlook for economic improvement and the growing price-inflation threat. Any rate pullback is an invitation to lock.

Life Isn't Linear

People are naturally drawn to trends. We like to think that there is order in the world and that life progresses one step after another. For that reason, we are attracted to graphs that are neat and tidy and move left to right in an upward trajectory.

Unfortunately, life doesn't work that way. Life is two steps forward, one step back, with a step or two to the side. That's why it is important to keep the long term in mind, even though our daily lives are focused on the short term.

In the short term, it appears rates have gotten away from us and that national housing prices are falling. (As we've explained above, that's not as important as the media lead us to believe.) This short-term perception has undoubtedly kept many naive home shoppers out of the market.

However, real estate is a long-term proposition. Over the long term, real estate is a good deal, and never more so than when purchases are made in a temporarily price-depressed environment with very favorable financing rates (and 5-percent 30-year fixed-rate loans are very favorable). We've been repetitive on this sentiment over the past couple months, but only because it's worth repeating.






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