Owning a home is still a great place to invest!

MARKET RECAP

The headline was ominous: “Housing starts drop 22.5 percent in February.” And for that matter, so were the numbers: the annualized pace of starts tumbled to 479,000 units – a 101,000 shortfall compared to the consensus forecast for 580,000 units.

However, when we delve into the facts, we find that things aren't necessarily bad. For one, January's spike in starts was way above the trend, so some reversal should have been expected. Second, winter months are notoriously volatile, and starts were hampered by severe weather in many parts of the country.

Homebuilders are still struggling, to be sure, but they might not be struggling as badly as the headlines suggest. In fact, homebuilders are actually feeling more upbeat these days. The March housing market index posted at 17, the best posting since the buyer-stimulus tax credits expired last April.

It is also worth noting that the housing market index is skewed by the small builder makeup of the National Association of Home Builders. With smaller builders feeling the heat more acutely than their larger brethren, and with their heavy inclusion in this index, the housing market index has a natural bias to accentuate the negative. Over recent months, many executives of the larger, publicly traded builders have offered news of better ordering trends than is reflected by the housing market index.

The recent trend in mortgage rates could further lift homebuilder sentiment. Investors have been pouring money into Treasury securities and mortgage-backed bonds in recent weeks because of Middle-East unrest and the Japan disaster. That means yields on Treasuries and mortgage-backed bonds have dropped, and so too have mortgage rates. Quotes below 5 percent for the 30-year fixed-rate loan were the norm across the nation this past week.

We don't expect it to last, though. Events in the Middle East will pass and fears over Japan 's ability to extract itself from its predicament will abate. The bigger issue, at least for mortgage rates, is price inflation. On that front, the embers are not only stoked but also starting to flame. Producer price inflation is red hot, posting a 1.6 percent increase in February. Year-over-year producer prices have jumped to a worrisome rate of 5.8 percent. On the consumer side, prices jumped 0.5 percent in February, following a 0.4 percent boost in January. Year-over-year, overall consumer-price inflation has increased 2.2 percent.

Energy costs have been the main driver of price increases, and they can be volatile. Nevertheless, a recovering economy tends to increase sustained-energy demand, so we doubt we will see much improvement in energy prices through the summer months. Bottom line: now is a very good time to take advantage of the lull in mortgage rates.

Warren Revisited
A couple weeks ago, we mentioned Warren Buffett and his investments in housing. We think it is worthwhile to revisit Mr. Buffett, because many of his views on housing and the mortgage market are in line with what we've been saying for the past year.

On the issues of FICO scores and employment, Mr. Buffett writes, “Your banker will tell you that people with such scores are generally regarded as questionable credits. Nevertheless, our [mortgage] portfolio has performed well during conditions of stress. Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc.”

On home ownership, Mr. Buffett offers the following, “Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home...For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.”

Admittedly, it might be self serving for us to selectively pick quotes that affirm our convictions, though there are at least two tangential insights worth pondering: First, mortgage markets would be more efficient and more borrower-friendly if they relied less on mechanical scoring and more on broker and banker acumen (which is why we look forward to more private-investor participation). Second, home ownership is far from dead like so many pundits were saying last year. In fact, we would be surprised not to see a home-buying Renaissance emerge in the near future.