My Mortgage Blog

Green Shoots

Here are a couple of things that are well worth watching closely in the first weeks and months of 2011.

First, we have a number of “green shoots”—hints in the form of positive economic indicators that the economy may be improving. This past week, for example, we had an eye-catching reduction in the number of new claims for unemployment insurance, with the total declining from the prior week’s 422,000 to 388,000. In the midst of four-business-day weeks, we should expect the numbers to be skewed a bit, but this offers up a bit of optimism I’m willing to enjoy…at least, until this Thursday’s numbers either confirm the improvement or send it away like a brief holiday fantasy.

Second, we have a 3.5% increase in the number of real estate purchase contracts signed in November, as against October. The National Association of Realtors? (NAR) attempts to give us an idea of whether real estate sales are improving or declining by keeping track of the deals that are officially on their way to a closing. What seems to me pertinent is that contracts were estimated to have increased by 10.4% from September to October. That number was corrected down slightly, but we still have a very strong rise in contracts in October affirmed by a solid rise in November.

This should mean we’ll see significantly higher new- and existing-home sales in the coming months. SHOULD—but the data for new mortgage applications thus far fail to confirm this. Watch this week’s combined data for the two weeks surrounding the end of the year. If they rise convincingly, it can be taken as a confirmation of NAR’s most recent monthly Pending Home Sales Index readings, mentioned above.

Now, what is particularly important here is the PERCEPTION of improvement in the real estate market. If, at long last, the improvement in the real estate market becomes credible, potential homebuyers may be convinced to enter the market before the rise among interest rates becomes truly sustainable and real estate values begin to firm.

It is not so much a matter of thinking the prices may initiate a steep and rapid rise. Few people expect that any longer, and real estate agents who trot out the old vision of buying now before the prices start to rocket will gain little traction with such an argument. The same is true for mortgage loan officers touting rising rates, since people are inclined to think the Fed will do what it can to keep interest rates from rising very far.

The point here is that the advantage buyers have enjoyed—with sellers so willing to negotiate—will fade away. It just won’t be as good a time to buy any longer.

Thus, we face the likelihood of self-fulfilling prophesies, as potential buyers increasingly agree 1) that prices are firming and are less likely to fall any further, 2) that the buyer’s market is peaking and sellers are gaining in negotiating power, and 3) that there is less to be gained and more potentially to be lost by waiting further to make a home purchase.

The refi market has already slowed dramatically, primarily because of rising mortgage rates. This is likely to continue. But purchase money loan applications should rise, especially at the lower (less expensive) end of the market. The recovery will, of course, remain a slow and uncertain—but we may see it improve more rapidly than most forecasters have predicted. The green shoots may indeed grow fairly rapidly (though the foreclosure crisis is sure to slow things far into the future).

Happy New Year to our many friends in the mortgage biz. May this year make a lot more economic sense than last year did, and may it prove profitable for all of us.