Mortgage Market – Confusing Economic Signals

In digesting any news or market an analyst most valuable contribution is sorting the signal from the noise. Unfortunately, in the current mortgage and real estate market we have too many noise makers: unpredictable executive and legislative actions, multiple regulatory opinions and guidance, skittish investors, and fearful consumers.

So, with that being said, I won’t try to be the mortgage market analyst. However, I will share some of the things I believe to be signals and I am not sure they point to recovery.

• Mortgage101 highlights an apparent deceleration in housing price declines. Two points of caution with statements like these: “deceleration of declines” does not necessarily indicate trend reversal and a decline is still a decline.

• I agree with Tim Manni, of HSH Associates, in his assessment that housing price stability is the only important indicator of economic recovery. Homes are typically 60-75% of the average homeowners’ net worth. If that is running to zero or negative territory we have a lot of poor people with no discretionary income for consumer and durable goods.

• This is a REAL ugly one: 1 in 4 Homeowners Said to Willingly Default on Mortgage. Having spent some time in the mortgage capital and secondary markets business–this is a violation of a fundamental assumption (a “constant” if you will) that would break every mortgage asset valuation model on Wall Street. Big trouble if this continues to play out!

• One of my favorite sources of real estate data, Altos Research, makes the case that “recovery indicators” may be seasonal not structural in which case we may not be recovering, but headed on the way back down (I tend to buy into this theory).

Here is my two cents on where I think the real signal is…

I think the housing market is still in a decline, one that may continue a downward decline in many local real estate markets for the following reasons:

1. I will start with an assumption: “all real estate markets are local.” Therefore, markets with traditionally conservative mortgage lending laws (Texas) and mild 2000-2004 price appreciation (Ohio) may experience different results. As is already the case.
2. There is a second wave of option and IO ARM mortgages in the queue ready to reset in late 2009-2010. Most of these borrowers are not refinancing or may not even be aware. More toxic assets.
3. Foreclosures and bank sales will continue to replace real estate inventory on par with home sales–keeping housing inventories flat despite rosy reports of increasing home sales.
4. Employment does not have a macroeconomic trend to reverse and absorb the growing unemployed labor force.
5. Government continues to executive order, legislate, and regulate with no material effect.
6. Government will have to pull out as a “market participant” at some point and regardless of how smartly it is done it will be a mess.

All this being said, I am not a pessimist. We’ll figure it out–capitalism always does. I just don’t think we have figured it out yet. And, I am inclined to think that is a good thing for long-term recovery.

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