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.

Buyer's Remorse? Pitfalls of Trying to Time the Housing Market

With the intensifying of what was already a buyer’s market, it is only natural for recent buyers to second-guess whether they should have waited. My advice as a professional realtor? Not to look back, for the following four reasons.

One. Peter Lynch, the stock market guru, is famous for opining that it is impossible to time the stock market. The same is true for real estate. Real estate bears sounding the alarm about over-valuation first started cropping up in . . . 2002. Buyers who heeded their advice and waited would have witnessed prices climb another 30%-50% the next three years -- still well above where they are since the current correction.

Real estate "bottoms" are just as difficult to call. Most real estate experts predicted – wrongly – that prices would start to rebound in the second half of 2007. Then, the sub-prime mortgage crisis hit in August.

It’s worth noting that a great deal of market commentators could be characterized as "retroactive bears," who whispered their warnings so quietly that no one took note. Or, they made so many, often contradictory predictions that sooner or later they were bound to be right about something, sometime (think, Jim Cramer’s stock picks on "Mad Money").

Second. Buying a home is different from practically any other purchase. If you buy 100 shares of Google at $600, then it subsequently goes down to $500, you might be inclined to kick yourself for not having waited. After all, every 100 shares of Google stock is identical to every other 100 shares (the definition of "fungible").

By contrast, homes are unique. While it’s true that the average house comes on the market every seven years, some homes change hands much less frequently, perhaps once every generation (or two).

In my own family’s case, it certainly would have been nice to pay 2008 prices for the home we purchased in 2005. However, we bought when we did because that’s when the home we really wanted came up for sale. We are only the fourth owner of our 1956 home; hopefully, the next owner will have to wait until sometime after 2022, when our youngest goes to college, for their chance.

Three. Living in limbo. Just as it’s said that no one washes a rental car, it’s also true that nobody re-tiles the bathroom in an apartment (or house) that they don’t own.

So much of what makes a house into a home is what buyers do to customize it to their tastes and lifestyle after they close. Painting, carpeting, buying furniture, minor (or major) remodeling projects – for many buyers, getting title is more accurately the "end of the beginning" than the "beginning of the end."

Waiting for the market to cool off – or rebound – delays all of that. Depending on one’s circumstances, it can also mean delaying getting children settled in their "permanent" school; acclimating to a new neighborhood; or simply stagnating in a too-small home that one’s family has clearly outgrown (see "upsizing," below).

In one’s mid-20’s, moving often involves little more than buying beer and pizza for friends while everyone loads a borrowed trailer. By contrast, moving a family may involve weeks of packing and unpacking, a professional mover, and other logistics.

Fourth. The economic upside of a down market. More than two-thirds of Americans own their own home. So buying a new home typically means selling their current one. For buyers who are upsizing, a real estate bear market can actually work in their favor.

Here’s how: say that buyers who own a $300,000 are now looking for a $500,000 home. Due to market conditions, their $300,000 house may have to be discounted 10%, to $270,000. However, 10% off of a $500,000 home reduces it to $450,000. The $50,000 they’ve saved more than offsets the $30,000 they "lost" (in fact, in most parts of the country, anyone who’s owned at least three years is still likely to realize a gain on their 2007 sale).

Of course, the math cuts the other way for people who are downsizing. Waiting to buy, regardless of market conditions, also makes sense for anyone who has a short-term horizon -- in real estate, typically defined as less than 3 years; buyers who are new to an area and don’t have their geographic bearings yet; and anyone who is so financially stretched that they can’t weather a down market, job loss, etc. – or can’t qualify for a mortgage in the first place (the non-sub-prime kind).

For everyone else, though, trying to time the market is likely to be an exercise in futility. The best time to buy is when you find the home you’re looking for at a price you can afford.