My Mortgage Blog

Dr. Alex Villacorta, the noatable Director of Research and Analytics at ClearCapital, looked over the recent numbers for real estate sales and observed, rather elegantly: “Housing now has the potential to enter a positive feedback loop. Price increases could lead to increased confidence. This could motivate buyers, propelling the recovery in spite of the potential economic slowdown outside the housing market. Of course it’s still possible that housing could experience a pullback if contagion from other economic sectors bleeds through, but right now there appears to be a healthy level of resilience.”

Now, this may sound a bit like life as viewed through rose-colored lenses—wherein sales volume climbs because prices rise (or is it that prices are rising because there are more sales…or both) but there is a method to Dr. Alex’s pleasant madness, and we’ve touched on it before.

We are at that crazy point in a recovery where, assuming that sales will take a hit if interest rates climb at all, we (and the Fed) do all we can to keep interest rates lower. The Fed, of course, wields a great deal of authority and power in this enterprise. But the rest of us have more power than we probably think. By bemoaning any upward move for rates, we tend to eliminate the evidence that the recovery is gaining strength.

A simple example: The text service from MortgageWatch that lets us know about the ups and downs of the Fannie Mae note, for all its genuine value, is programmed to tell us when rates are likely to move in a “bad” direction (that is, up) or a “good” direction (down). Inadvertently, this is quietly programming us to miss the forest for the trees. Because rising rates—today, at least—tend to mean that there are reasons to believe that the economy is looking better than it did yesterday.

Rates rise, in this market, on good news. They fall on bad news. It is therefore confusing if we assume that rising rates are “bad.”

What sort of good news inspires rates to rise a bit today? Bear with me, because this is rather obvious—though most credit market analyses in the popular press seem to be missing it. Let’s say that the number of New Home Sales climbs, surprising the markets with their strength. This is definitely good news. It means more jobs for the construction industry, more work for a vast array of specialists ranging from carpet layers to landscapers. And the more money that goes out in the form of salaries, the more money that comes back in to purchase homes and related items.

This truly, is the heart of the positive feedback loop that Mr. Villanova speaks of. We know it is there, but we haven’t been acknowledging it. And since it’s a matter of buyer and seller psychology, the less we speak of it and acknowledge its existence, the less power it has in our real estate economy.

Where is this truly apparent? In the New Homes sector, among other placees.

We have long lines of ready, willing and able buyers who, largely because there are too few homes for sale haven’t yet made their purchases. But the demand for a home—much of it pent-up demand at this point—has not been stopped by the lack of inventory, nor even by the recent bad news about the overall economy.

It keeps on keeping on. It’s exciting to watch. It’s like a circus master, inviting us all to the new vibrant ring in the real estate circus.

I realize there are still those who hold on to their doubts about a recovering New Homes market. But look at the numbers. Look at how incredibly behind the size of demand for new homes our marketplaces are. Look closely, and you may be a believer, too.