Weekly Market Update

Keeping you updated on the market!
For the week of

June 6, 2011

MARKET RECAP

Have we really regressed to 2002? That's what we are being told by the S&P/Case-Shiller home price index, which claims national home prices have fallen to 2002 levels. According to Case-Shiller’s monthly index for March (it’s actually an average of three months), national prices have double-dipped, declining 4.2 percent in the first quarter, thus, returning us to 2002 price levels.

However, have we really gone back to the future? A day after the Case-Shiller home price index was released, CoreLogic released its own home price index for April (also a three-month average). CoreLogic's index shows that home prices increased 0.7 percent between March and April – the first increase in the index since the homebuyer tax credit expired in mid-2010.

So why the discrepancy? Case-Shiller seasonally adjusts its data while CoreLogic does not. More important, CoreLogic's index is timelier, covering three months ending in April versus Case-Shiller’s March number.

It's also worth noting that CoreLogic produces another index. It excludes distressed sales from the equation, which makes this index just a bit more interesting: Y ear-over-year home prices including distressed properties were down 7.5 percent in April. Excluding distressed properties, CoreLogic’s index shows prices are up 0.5 percent.

We instinctively look for silver linings, but are things really as lost as the most pessimistic pundits contend? Our answer remains “no.” Housing is more affordable than it has been at any time in the past decade, and it may begin to look even more affordable as rental rates continue to rise. While foreclosures remain near their high, mortgage delinquencies are falling.

Credit remains a concern, though. Transactions that could be completed in normal circumstances aren't, because the circumstances today aren't normal. Mortgage rates are low. In fact, they are the lowest they've been in three years, namely due to circumstances few (including us) expected: slowing economic growth and a surfeit of negative economic and world news that has many investors rushing to the haven of U.S. Treasury securities. (The 10-year Treasury note now yields under 3 percent.)

In our opinion, too many people are too risk adverse these days: Insurance premiums on loans backed by the Federal Housing Administration have risen twice in the past year, and banks are scrutinizing borrowers’ incomes and tax returns with an unforgiving eye. Borrowers are either paying higher rates or being turned away who wouldn't be under analysis that is more subjective.

There is a lot we can do for borrowers, to be sure, but we know, given our expertise and experience, there is a lot more we could be doing.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Consumer Credit
(April)

Tues., June 7,
3:00 pm, et

$4 Billion (Increase)

Moderately Important. Revolving credit remains the main driver of credit use.

Mortgage Applications

Wed., June 8,
7:00 am, et

None

Important. Purchase applications continue to hint at improving sales data.

Federal Reserve Beige Book

Wed., June 8,
2:00 pm, et

None

Important. Recent economic weakness could extend the Fed's low-interest-rate policy.

International Trade
(April)

Thurs., June 9,
8:30 am, et

$47.8 Billion (Deficit)

Moderately Important. Rising oil prices continue to swell the trade deficit.

Import Prices
(May)

Fri., June 10,
8:30 am, et

1.2%
(Increase)

Important. A weakening dollar is causing import prices to rise, which could stimulate consumer price inflation.

Fighting Cognitive Dissonance

We do not allow ourselves to become overwhelmed by “expert” opinion, if for no other reason than to maintain our mental stability. If we were to let our emotions ride with every new opinion from every putative expert, we'd find ourselves paralyzed into complacency.

Besides, “experts” aren't as expert as we might think. University of California , Berkeley, Professor Philip Tetlock tested 284 “experts” in political science, economics, history and journalism in a staggering 82,000 predictions. Tetlock concluded that their predictions were no more accurate than uninformed guesses. Tetlock hypothesizes that being deeply knowledgeable on one subject narrows focus and increases confidence but also blurs the value of dissenting views and transforms data collection into belief confirmation.

Now, we probably consider ourselves experts in our particular field of housing and finance. However, does that mean we should give up predicting the outlook of the housing or mortgage markets? Actually, no, as long as we are willing to take a balanced approach. Tetlock also notes that “thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible ‘ad hocery’ that require stitching together diverse sources of information” are actually more accurate forecasters.

For this reason, we focus on data most media outlets tend to downplay. We like to add differing information to the debate to present a more balanced view of the market, and, hopefully, more accurate forecasts of what may lie ahead.