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Bellevue Real Estate, Mortgage, and Economy 10/4/10

Posted on 04 October 2010

Here is the Bellevue Real Estate Report for October 4, 2010.

We’ve always been somewhat circumspect over the value of the S&P/Case-Shiller home price index, but since it grabs an over-sized portion of media attention, it’s worth mentioning. On that front, the index rose 0.6 percent in July to increase the year-over-year price gain to 3.2 percent. Of course, that’s an average of the 20 metropolitan areas the index tracks. When the data are disaggregated further, the index shows prices rose in 12 of the 20 metropolitan areas, which, unfortunately, still reveals little about any particular market, where prices changes can deviate meaningfully within a 10-mile radius.

Looking at other national data, RealtyTrac made headlines by noting that sales of homes in the process of pre-foreclosure or out of lenders’ REO portfolios accounted for 24 percent of all sales in the second quarter of 2010. Putting a more positive spin on the data, RealtyTrac also reported that while the actual numbers of properties involved in foreclosure sales increased in the second quarter, the market share of foreclosure sales actually dropped seven percentage points from the first quarter.

RealtyTrac’s data has discouraged many pundits over the past few months, invoking prognostications of a tsunami of foreclosed properties, currently hiding in shadow inventory, swamping the market with millions of homes no one really wants. The logic portends an ominous 2011, because more homes can mean only one thing – lower home prices. Indeed, many in the commentariat are still calling for another 10 percent drop in national prices.

We disagree. We think there are too many signs pointing to stabilization and recovery for home prices to drop further. The latest sign, courtesy of the Institute for Supply Management-Chicago Inc., shows that companies continue to boost orders for manufactured goods as they replace outdated equipment and rebuild inventory in order to meet growing consumer demand. The downtrend in first-time claims for unemployment benefits is another sign, suggesting that next Friday’s employment report could be worth anticipating.

An improving labor market could get mortgage rates moving higher. Admittedly, that hasn’t been the case this past year and rates continue to hold (but not exceed) their lows. The recent surge in the price of gold (a historical inflation hedge) and other commodity prices lead us to believe that pressure for higher rates is building. In other words, borrowers should take advantage of the current mortgage-rate environment. If they haven’t refinanced this year, they should, because there’s a very good chance their refinance options are in the money.

Someone who has made billions of dollars predicting moves in the housing market is probably someone worth listening to, which is why we think it’s worth listening to money manager John Paulson. Paulson made billions in 2007 on a very complicated trade betting that home prices would fall – and fall dramatically – which they did.

Fast forward to 2010, and Paulson is singing a different tune. CNBC reported that Paulson, while speaking at the University Club in New York City last week, said, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

So why the unbridled optimism on Paulson’s part, especially when there is data stating that housing prices still need to fall before they equate to pre-bubble equilibrium? We can only speculate, but data from CNBC show that from 1970 to 2000 home prices correlated closely with the consumer price index. This pattern broke in the recent housing bubble, with home prices surging even as the CPI fell. Perhaps Paulson believes that the correlation between home prices and inflation is converging to previous norms.

It would be nice to know Paulson’s reasons for optimism, but we do know ours (which have been stated with great regularity). That said, we feel even more secure in our bullish opinion knowing that someone of John Paulson’s magnitude apparently agrees.