Market Recap For The Week Of October 12, 2009

Every day lower prices are becoming less so. Zillow.com reports that homebuyers paid a median of 3% below the last listing price for properties in August. While that amounts to $6,525 in savings, it is still less than the median 3.3%, or $7,018, buyers paid below listing price in July.

To be sure, additional price firming is needed before the market swings in favor of sellers. In some markets, pricing weakness remains an intractable problem. To wit, buyers in the Vero Beach , Fla. metropolitan statistical area were able to negotiate a median of 8.9%, or $20,974, off the last listing price in August, according to Zillow's data.

Nevertheless, in many markets, particularly those on the lower end, prices are firming or have already firmed. For example, in two well-known overbuilt California markets, the El Centro and Stockton MSAs, buyers paid a median 2.2% ($2,479) and 1.3% ($2,515), respectively, above listing price.

A Confounding Interest Rate Environment

What is going on? We keep warning that mortgage rates cannot go much lower, and yet each week they keep going lower. The phenomenon is difficult to explain: Gold – a traditional inflation hedge – is up over $100 an ounce in the past three months, yet over the same period, the yield on the 10-year Treasury note – a mortgage-rate base – is down nearly half a percentage point.

Meanwhile, Federal Reserve officials keep making a case for higher interest rates down the road, though they keep pushing the case further down the road. Federal Reserve Chairman Ben Bernanke says the Fed will reverse course and tighten policy when the economic outlook improves sufficiently, though he also said accommodative policy would be needed for an extended period.

Does that mean we have been off base on our prognostication for higher mortgage rates anytime soon? We still do not think so. Yes, the 10-year Treasury note's yield has moved considerably lower over the past 90 days, but we can't overlook the fact the U.S. dollar has taken a pounding this year from record-low interest rates and massive fiscal spending. We also cannot overlook record-high gold prices, the record-level of liquidity pumped into the economy, and the prospect of the economy improving quicker than many market-watchers expect.

Therefore, we feel confident in saying – yet again – that this is a darn-good mortgage-rate environment, but it is a mortgage-rate environment unlikely to be so good in coming months.

Lower-end markets have obviously benefited from the $8,000 first-time buyer's tax credit, set to expire November 30. The looming expiration date has more than a few housing-market pundits worried that the sales trend could reverse course. It is a legitimate concern, but it is also worth noting that other variables formulate the buying decision, and no variable is more important than employment. Most of us know that the unemployment rate increased to 9.8% in September. However, recent data show seasonally adjusted unemployment insurance claims fell 6% nationally, hitting the lowest number since January.

Of course, mortgage rates are another important buying-decision variable. On that front, Bankrate.com reports that the national average for a 30-year fixed-rate mortgage is around 5.2% and around 4.6% for a 15-year fixed-rate mortgage. Freddie Mac's survey has each loan averaging thirty basis points lower than Bankrate.com.

If you are concerned with the first-time homebuyer’s tax credit expiring, do not be too concerned. We think odds favor an extension. The American Land Title Association, the National Association of Realtors, and the National Association of Home Builders have all been lobbying hard. In addition, Mark Zandi, chief economist at Moody’s Economy.com and a consultant for many influential politicians, is not only advocating extending the credit through August but also making it available to all homebuyers.

From the Mortgage Matters Publication