Predicting Interest Rates

Predicting housing prices recalls Mark Twain's old saw about picking stocks. "Picking stocks is easy," he said. "Only buy stocks that go up. If they don't go up, don't buy 'em."

Similarly, to divine the direction of housing prices, just figure out where the economy and interest rates are headed (plus employment and inflation). Once you've done that . . . you know where housing prices are headed!

Unfortunately, no one has shown an ability to accurately forecast the direction of (long-term) interest rates, Federal Reserve Chairman Ben Bernanke included. (The Fed controls short-term interest rates, so that's another story). However, there do seem to be some predictable, seasonal influences that buyers and sellers should take note of.

Just as gas prices predictably rise ahead of Memorial Day weekend, when people fill up their tanks for car trips, interest rates tend to rise in Spring. Lenders know (surprise!) that that's when the housing market is busiest, especially in climates with extreme Winter (or Summer) weather, and the greatest number of buyers are in the market for mortgages. Economics 101 says higher demand for mortgages translates into higher interest rates.

Conversely, rates tend to be lowest when housing activity is at low ebb. In the Twin Cities, that interval frequently spans from just before Thanksgiving until around the beginning of February.

So, should you wait until late Fall to buy? Probably not, for two reasons. First, the foregoing seasonal influences are relatively weak, like lunar tides. They can -- and are -- overridden by stronger forces, like the direction of the economy.

Second, while rates may indeed be lower closer to Thanksgiving, the selection of homes for sale is typically smaller, too. Better to get the house you really want, then wait to refinance, than get a marginally lower interest rate on a home that may not be as good a fit.

Closing (Real Estate) Barn Doors?

Lenders Hike Down Payment Requirements

Burned by defaulting loans, at least some lenders are now adopting practices that stand to make things worse ("Zip Code 'Redlining'", Kenneth Harney; Washington Post 2/2/2008). To reduce risk, Countrywide Bank and others are now characterizing whole areas as either rising or declining, with shades therein. Where prices are deemed to be declining, the lenders are requiring beefed-up downpayments to provide an extra margin of security.

Unfortunately, tighter financing terms directly reduce demand, which pushes price down further.

Look for Congress and the Fed to address this, either by corralling the practice in its infancy, or, doing something to offset buyers' diminished purchasing power (tax cuts, lower interest rates, etc.).

Bridging the (Expectations) Gap

Holding Out for 2009 Prices???

Perhaps the single best word to describe the current housing market is "cautious." Inundated by negative media and predictions of price drops, buyers want to pay 2009 prices -- or what they think they will be. Meanwhile, many sellers -- notwithstanding exposure to the same media reports -- are intent on holding out for 2007 (or 2006!) prices.

The not-suprising consequence of this impasse is a drop in sales activity. Just today, the Mpls. Association of Realtors reported a 20% drop in pending sales compared to the same time last year.

So what's likely to re-start the market? Anything that serves to bridge the gap between buyers and sellers.

For buyers, the most likely candidates are: 1) lower interest rates, which increase their purchasing power; 2) tighter inventory, a classic sign of a market bottom; and 3) a strengthening economy, or at least the corner of it that the buyer occupies.

Meanwhile, many sellers are likely to lower their expectations -- and their asking prices -- only when they believe that the price their house is likely to fetch now is higher than what they can expect to get by waiting ("wait till next year" is no longer just the refrain of Chicago Cubs fans). For now, at least, many sellers are clinging to the opposite notion.

Of course, the other reason buyers and sellers do deals is precisely because they can't wait. The new job in another city begins next month; the house meant for a cozy family of 3 now has 5 (or the reverse); the lease is up, etc.

Fortunately, no matter what market conditions prevail, the method realtors (and appraisers) use to establish value is the same: identify comparable "sold" properties, then compare and contrast with the subject home. Because "comp's" by definition are trailing data (though not too trailing -- sales more than six month old typically don't count), in a rising market they need to be adjusted upwards; in a falling market, the reverse.