Jumping Rates Hit Refis

Is it me or does it seem like every time it feels like we have put the worst behind us something else happens?  Mortgage rates have started to jump recently due to inflationary worries.  Only a few months ago we were more concerned with deflation.  The American public must be wondering 'what the heck is going on?'  In my opinion, the recent unrest in the Middle East, while fascinating and in the long term positive, is allowing shrewd speculators to venture into and I am sorry, manipulate the commodities markets.  Just back in 2008 we saw something similar as corn, oil and other commodities appreciated at meteoric rates.  We all know it was investment banks and large hedge funds driving it and there was supposed to be limits on speculative positions in some commodities, namely food, to stop this.  Have they been put in place yet?

While Libya represents only 2% of the world's oil supply, prices increases in the oil markets have far exceeded that and are up around 14%.  This when Saudi Arabia can make up for any supply interruptions of this size.  So what is going on and why should it matter and what in the world does this have to do with real estate?

Well if oil goes up and stays up, the cost of everything, farming, transportation of goods, materials made of plastics, everything starts going up and a 'cycle' of inflation can occur.  Bond markets price the risk of future inflation and if they, the bond investors, see inflationary worries, they pull back and bond prices fall.  Since interest rates are inverse to bond pricing, the rates start to climb until they are high enough to entice enough buyers into position to create stasis.  Mortgage rates are closely tied to the 10 year U.S. Treasury note. So there you go. 

My fear is that if speculating drives oil prices too high for too long, any momentum we have started to seen in real estate will be quashed.

"Housing Statistics Hit Rough Waters"

In the January 8-9th Wall Street Journal article with the above quoted headline, Carl Bialik is dead on with his analysis of the housing statistics that get thrown around .  I encourage you to read the full article but here are some highlights.  He first points out that only 2/3 of all homes have mortgages so if you hear that 22.5% of homes with mortgage have negative equity, which CoreLogic reported in December, that means that 15% of all homes in the U.S. were underwater.  He goes further to say that most are concentrated in a handful of states, Arizona, California, Florida, Michagan and Nevada.  These states combined for 31% of all mortgages nationwide but 53% of all underwater mortgages. 

In addition, 7% of that 22.5% are underwater by 10% or less.  That means that just under 9% of all homes nationwide are underwater by over 110%.  If you are not confused enough by now, there are many more homeowners with slightly positive equity than slightly negative equity so if the methodology for home valuations used by CoreLogic & Zillow are flawed or greatly inaccurate, more people are likely to be shoved into the negative equity bracket than positive.  CoreLogic claims its valuation estimate is within 10% of a sales price 55% to 75% of the time while Zillow claims it is within 10% almost half of the time. 

So what should the reader take from all of this?  There is clearly a bias to the negative in both the statistical methodology and the media at large.  Yes, this has been a crisis of epic proportions and devastating to many, but wallowing in the negative and refusing to acknowledge anything positive can only lead to more of the same.  Markets are simply a group psychology. (Read upcoming blog on markets)  Thankfully there are some lie Mr. Bialik who can bring some measure of sanity to the news cycle.