Why 2011 Could Be The End Of The Housing Crash (WSJ)

There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop.

Either way, it will be welcome relief for current homeowners as well as for potential real-estate investors. Reasons to be optimistic have been sadly lacking since the housing bubble burst in 2006.

Andrew Roberts

For sure, last week we learned the widely watched S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline. The index tracks 20 major markets.

But that figure belies real reasons to be optimistic, according to some experts. If they are right, it might make sense to jump into real estate. The trick is avoiding getting burned again, and it doesn't necessarily mean owning a home.

First, let's recap the economic signs a bottom is close.

Houses Are a Good Deal

Housing is the most affordable it has been in decades, according to analysts at Moody's Analytics. They don't just look at house prices. They also look at incomes.

Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. Prices usually average close to two years' pay, although that varies nationally.

At the peak, midway through the last decade, a home in Los Angeles cost the equivalent of 4.5 years' pay. The average price has since fallen to just over two years' income now. That's well below its pre-bubble average of 2.6 years. This means average Los Angeles homes are cheaper in "real terms" than they were typically during the period 1989 through 2003.

The opposite is true around the Washington beltway, where it will take 26 months of pay to buy a home, versus the historical norm of 22 months.

In the end, it will be affordability that will drive people to buy homes.

"Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own," says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.

It is definitely bullish. But what about timing?

"Housing prices will probably bottom in 2011," says Scott Simon, a managing director at money-management firm Pimco in Newport Beach, Calif. He foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.

Mr. Simon says prices might dip another 5%. Still, in the scheme of things, that's small. Consider this: In some markets, home prices have fallen by half or more since 2006.

For instance, in once-hot Miami you can snap up an average house for under $166,000, according to recent data from the National Association of Realtors. That's down from $371,000 in 2006. Another 5% drop would take it to $158,000.

Investors Stepping Up

Here's another sign the market is nearing a bottom: Investors have started to buy up houses and condos, in some instances paying entirely in cash. That's a far cry from the heady bubble days when borrowed money seemed the key to riches. The bubble-era speculators who got burned tended to buy at the peak and borrowed heavily to do so. When the crash came, they quickly saw their wealth erased.

Take Miami again. Last year, more than half of all transactions were made entirely in cash, according to a recent report in The Wall Street Journal. That compares with 13% of deals in the last quarter of 2006, the height of the bubble. Similarly, in Phoenix 42% of sales in 2010 went to all-cash buyers, up threefold since 2008.

It's a sign that these investors are betting on a rebound. Investors buying at current prices are looking for deals, or so-called bottom fishing. They typically like to pay entirely in cash (or with a relatively small loan) to speed up transactions. That can be vital for an investor wishing to lock in a deal fast.

If this is a turn in the market, then it might make sense to go out and buy a home. But, warns Pimco's Mr. Simon, "buy in areas you really know."

Plan to Stay Put

Buy and hold. While the good news is that the worst of the housing crash might be over, the bad news is that the fast gains of the glory days of 2005 and 2006 won't be back any time soon. So to cover the costs of buying and selling, and what could be a prolonged recovery, plan to own for more than 10 years, explains Jack Ablin, chief investment officer at Chicago-based Harris Bank.

Also remember that borrowing money to buy a house can still be risky. If you pay for a $100,000 property with $20,000 cash and borrow the rest, a dip in the value of $20,000 would leave you with zero equity. On top of that, you'd have to pay to maintain and repair the property, something not necessary when renting.

Home Buying Without a House

There are other ways to benefit from a real-estate rebound than directly buying a house. Such investments include stocks, mutual funds or exchange-traded funds. Unlike homes, which typically cost tens of thousands of dollars, these financial investments can be made in smaller amounts and typically are easy to sell.

Weiss Research's Mr. Larson says although new homes are oversupplied, home builders might benefit from a rebound as the situation rights itself.

Rather than pick individual stocks, he says, it probably makes sense for small investors to pick broader investments that hold many different stocks. In particular, he points to the SPDR S&P Homebuilders ETF (XHB), which tracks a basket of home-builder stocks.

Mr. Larson also highlights specialized mutual funds such as the Fidelity Select Construction & Housing fund (FSHOX), which tracks home builders as well as home-improvement retailers likeHome Depot and Lowes that would also likely benefit from a housing recovery.

—Simon Constable is author of the forthcoming book "The WSJ Guide to the Fifty Economic Indicators That Really Matter: From Big Macs to 'Zombie Banks,' the Indicators Smart Investors Watch to Beat the Market." 

Why Mortgage Rates Are Going Up

1. Mortgage bonds have been trading negatively which causes rates to rise

Understanding what determines mortgage rates is quite simple. Mortgage rates are traded everyday as mortgage bonds (MBS) just like stocks. They either go up or down in price on a daily basis. Here is a picture of a mortgage bond trading chart below. When bonds (green line) are trading lower mortgage rates (red) are higher and when bonds are trading higher mortgage rates are lower. Mortgage bonds have been trading lower recently which is driving rates up.

 

When bonds trade lower (green), lenders raise their rates and distribute “Reprices for the Worse” (see chart below) and republish these higher rates to the public. This trading of bonds directly correlates to the mortgage rates we see everyday from lenders.

When Bonds Trade Lower Mortgage Rates Increase

 

What economic events force rates to go up or down?

 
So what causes mortgage rates to go up or down and mortgage bonds to trade higher or lower? These are tied to some fundamental economic activities that take place everyday in our markets, by understanding these you will now be able to determine what direction rates will probably go for your clients.

2. A rising stock market causes rates to rise

Mortgage bonds compete everyday for investors dollars in the open markets. Stocks pay a higher rate of return so they are more risky, bonds have a lower return so they are seen as more stable and less risky. Remember: When there is weak economic news (higher unemployment etc), this normally causes money to flow out of Stocks and into more stable Bonds helping Bonds and home loan rates improve. When there is better economic news (lower unemployment, more homes sold etc) this normally has the opposite result, so investors will put their money into more risky stocks, thus causing mortgage rates to increase. Economic data has been improving recently so this is why rates have been rising. It is an interesting dynamic that generally worse economic news is good for mortgage rates!

3. Rising Inflation is causing rates to rise

is going to be a problem soon because of all this money that is being printed to pay for Government spending. So how will this affect mortgage rates? The bottom line is that as inflation increases, home loan rates will rise too. That’s because lenders know that a rise in inflation actually diminishes the value of the money they receive over the life of a loan, as the money they receive for payment simply won’t go as far. So when they see changes in inflation or even anticipate a rise, they increase their interest rates to make up for the loss in future buying power that will happen as a result of inflation. 

4. The 800 pound gorilla in the room..growing US debt is causing rates to rise

As ths US continues to add to its already burgeoning $1.5 Trillion dollar deficit, investors around the world who lend the US money by way of buying treasuires and bonds are going to demand a higher rate of return for the financing of US government spending. Because the larger the US debt level grows the higher the chances of a default sometime in the future, and so investors will price this accordingly. Just 3 months ago the 10 year bond rate (the 30 year fixed mortgage rate follows this) was at 2.5%, today it is at 3.75%..you can thank The Fed and Ben Bernanke for this, as they have been adding to the US debt load by way of printing money via their ”QE” Quantitative Easing programs, so investors are now demanding a higher return on their investment. So until the US gets its fiscal house in order and tackles the deficit, long term rates will continue to rise. 

Rising rates affect buyer budgets and loan approvals  

It is also very important to show buyers that rising interest rates will eat away any savings they could get from waiting for prices to dip again. Eventually a buyer needs to make a decision about what is most important, either their monthly payment or “finding the bottom of the market in terms of price”. Higher interest rates are going to affect buyers budgets dramatically too, while also affecting any current offers or loan approvals they may have. Lenders have tightened qualifying ratios recently, so make sure any increase in payments will still get approved.

Tenants Improve Credit Score With On-Time Payments

TENANTS WITH GOOD PAYMENT HISTORY GET CREDIT-SCORE BOOST | MORTGAGE MATCH NEWS

Good news for good tenants: One of the three major credit-rating agencies has begun to include some on-time rental payments in its reports.

The plan, by an arm of the Experian credit-reporting agency, won’t exactly create a whole new day for renters who are trying to build (or re-build) their credit scores in order to qualify for a mortgage or other loans, but it’s a start.

Experian recently began to include rental information garnered from property-management companies nationwide in its credit reports, which are used to formulate credit scores. The firm estimates that eight million tenants, who generally live in larger apartment complexes, will be affected initially by its decision to report on-time rental-payment records from Experian RentBureau, an arm of the company.

Historically speaking, tenants in general haven’t gotten any credit traction from being on time with their rent because the apartment business is so splintered, according to Brannan Johnston, vice president and managing director of Experian RentBureau.

“There are many thousands of property-management companies, none of which have a huge share of the market,” he said. “There’s not an equivalent of a JP Morgan Chase or an Amex that’s going to contribute to the market data” for renters to the credit-reporting bureaus.

Those eight million renters in the Experian RentBureau database represent just a slice of the nation’s 96 million renters, according the National Multi-Housing Council, a trade group for major landlords. But Experian said it hopes to expand its database  because renters are a considerable – and overlooked — demographic phenomenon.

“There’s a growing number of people who are graduating from college and are trying to get a cell phone, rent a car, or get a credit card and are unable to, because all they’ve done is establish a history of paying rent on time, and it’s not going anywhere,” said Johnson.

Experian’s new policy means that lenders can update their underwriting procedures to automatically include rental-payment records. But whether the data reported by Experian will be used on a broad scale to qualify renters for mortgages may take time to decide, according to Joanne Gaskin, a spokesman for FICO, the developer of the formulas that calculate the FICO Score, upon which much lending is based.

“It’s early to say,” said Gaskin. “We’re looking forward to receiving a sample so we can evaluate the predictive value of it and make a consideration for inclusion. Our approach is that we let the data tell the story.”

via mortgagematch.com

For first time buyers, every little bit helps and this is good news for responsible renters looking to purchase their first home.